Malaysia sukuk premium shields returns imperiled by ringgit loss

[KUALA LUMPUR] Malaysia's ringgit sukuk are outperforming as their relatively higher yields offset the outlook for a weaker currency.

Sovereign domestic notes due in 2016 and 2021 returned 2.5 per cent and 3.3 per cent respectively this year, compared with 0.8 per cent and 1.8 per cent for similar Islamic dollar debt, data compiled by Bloomberg show. The premium for the 2016 securities over their global counterpart is more than 200 basis points. Macquarie Group, the second most-accurate forecaster for the currency in the three months through June, predicts Asia's worst-performing exchange rate will decline another 1.1 per cent before Dec 31.

The ringgit's losses have been exacerbated by a plunge in prices for the nation's oil exports and an investigation into finances linked to a state investment company, just as the US gears up to increase interest rates. Global funds have so far shrugged off those concerns, raising holdings of Malaysian government bonds to a record in June.

"From a currency perspective, it's a safer option to buy dollar sukuk than ringgit bonds but it is also a lower-yielding option as well," said Winson Phoon, a Kuala Lumpur-based bond analyst at Maybank Investment Bank, a unit of Malaysia's biggest lender.

The yield on Malaysia's November 2016 ringgit sukuk fell 35 basis points this year to 3.35 per cent, compared with a six basis-point decline to 1.31 per cent for its similar-maturity dollar bonds.

The currency has dropped 8.2 per cent in 2015 as political wrangling over state fund 1MDB that's dragged on for about a year culminated in a probe. A task force that includes the police and the central bank is investigating allegations that cash associated with the company found its way into Prime Minister Najib Razak's accounts, a claim he disputes as pressure for him to resign builds.

Analysts have lowered their year-end ringgit forecasts to 3.80 a dollar from 3.76 on June 30, according to the median estimate in a Bloomberg survey, with Morgan Stanley's prediction of 4 the most bearish. The currency sank to a 16-year low of 3.8130 this month.

Malaysia has two other foreign-currency sovereign sukuk outstanding that were issued in April and come due in 2025 and 2045. The securities are both posting losses as the risk of US monetary tightening damps demand for longer maturities.

The yield on the shorter 2021 dollar Islamic notes has retreated two basis points this year to 2.86 per cent, while the yield on similar-maturity ringgit notes fell 23 basis points to 3.91 per cent.

The 1MDB debacle is overshadowing the US$327 billion economy, which is officially forecast to expand 4.5 per cent to 5.5 per cent this year, holding above growth rates since 2009 when the economy contracted during the global cash crunch.

The South-east Asian nation escaped a credit downgrade from Fitch Ratings in June as the government took steps to shore up its finances after the assessor warned in March of the possibility of a cut, citing 1MDB as a point of concern. Malaysia's rating outlook is stable, Kim Eng Tan, head of Asia sovereigns at Standard & Poor's in Singapore, said on a conference call Monday. The government is less able to react to shocks as it deals with 1MDB, he said.

"Political uncertainty is never welcome," said Nizam Idris, Singapore-based head of currency and fixed-income strategy at Macquarie Bank, who sees the ringgit declining to 3.85 this year. "The political uncertainty here is that there could be a change of government or at the minimum, a change in leadership." BLOOMBERG