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Malaysia's RM70b transport binge spurs Islamic bond sales

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Top underwriters see Malaysian corporate sukuk sales rebounding from a four-year low as Prime Minister Najib Razak ramps up spending to boost an economy forecast to grow at the slowest pace since 2009.

[KUALA LUMPUR] Top underwriters see Malaysian corporate sukuk sales rebounding from a four-year low as Prime Minister Najib Razak ramps up spending to boost an economy forecast to grow at the slowest pace since 2009.

RHB Investment Bank Bhd, the second-biggest arranger of ringgit Islamic debt, sees issuance rising 7 per cent to 60.2 billion ringgit (S$20 billion) in 2016, encouraged by Bank Negara Malaysia's monetary easing in July. AmInvestment Bank Bhd, the fourth-largest, forecasts as much as 70 billion ringgit.

Sales of notes which comply with Koranic principles have picked up after Najib kicked off US$16 billion of road and subway projects this year in partnership with the private sector. Ten-year Malaysian sovereign sukuk yields slid to the lowest since 2013 this month amid analyst forecasts for 2016 economic growth to slow to 4.1 per cent.

That gives issuers an incentive to seek funding before any Federal Reserve rate increase boosts global borrowing costs.

"The conducive market environment for fixed-rate financing will likely lead to more corporates front-loading sukuk issuance in 2016 rather than face the risk of potentially higher funding costs in 2017," said Angus Salim Amran, the Kuala Lumpur-based head of financial markets at RHB Investment Bank.

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"The unexpected cut in Bank Negara's overnight policy rate in late July stimulated stronger demand for sukuk." Offerings of Islamic notes have climbed 69 per cent to 50.4 billion ringgit this year, data compiled by Bloomberg show.

Issuance totalled 56.2 billion ringgit for the whole of 2015, the least in four years as a slump in oil prices damped growth in Malaysia and the Middle East.

Bank Negara's July interest-rate cut pushed the yield on 10-year Islamic government bonds to 3.56 per cent this month, the lowest since June 2013.

A slew of infrastructure-related sukuk sales has revived Malaysia's US$105 billion corporate Islamic bond market.

Public Sector Home Financing Board, which manages the provision of housing loans to civil servants, sold 3.4 billion ringgit of government-guaranteed Islamic notes this month, while Lebuhraya Duke Fasa 3 Sdn Bhd offered 3.64 billion ringgit of Shariah debt in August to finance a highway in Kuala Lumpur.

In July, Jambatan Kedua Sdn Bhd, the state-owned concessionaire for a bridge linking northern Penang state with the peninsula, sold 2.6 billion ringgit of Islamic notes, while Sarawak Hidro Sdn Bhd, which manages the nation's biggest hydropower dam, issued 5.54 billion ringgit of sukuk.

Fundraising is needed for construction of 1,800 kilometres of roads getting underway in the Borneo island states of Sabah and Sarawak. Other potential issuers include Prasarana Malaysia Bhd, which is financing a 10 billion ringgit extension of Kuala Lumpur's light-rail network.

"There is good visibility of pipelines which are likely to materialise by end of the year," said Winson Phoon, a fixed-income analyst at Maybank Investment Bank Bhd in Kuala Lumpur.

"Possible headwinds include unexpectedly hawkish policy by major central banks to the extent that it spooks markets and triggers a bond selloff in developed markets."

Mr Najib is spending on infrastructure after South-east Asia's third-biggest economy was hit by weakness in oil and rubber exports. Some 260 billion ringgit has been allocated for development expenditure under the 11th Malaysia Plan covering 2016 to 2020, up 13 per cent from the previous period.

"I don't rule out the possibility of 2016 sales surpassing 70 billion ringgit because there is still a strong pipeline of issuers looking to lock in low borrowing costs," said Mohd Effendi Abdullah, the Kuala Lumpur-based head of Islamic markets at AmInvestment Bank.

"Corporates also have a lot more confidence to sell because they know there will be demand."


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