Oil-squeezed Malaysia seen selling sukuk as US$1.2 billion matures

[KUALA LUMPUR] Malaysia will face pressure to sell global sukuk next year as US$1.2 billion of Islamic debt matures in July and plunging oil prices erode fiscal revenue and currency reserves.

RHB Investment Bank Bhd and Union Investment Privatfonds GmbH see demand for a new Islamic bond holding up because of a scarcity of dollar sukuk and longer-term prospects for Malaysia's finances. The ringgit has rebounded 1.5 per cent this quarter, paring its losses to 19 per cent for 2015, a year in which reserves slid below US$100 billion for the first time since 2010.

Prime Minister Najib Razak repeated a warning last week that government revenue for Asia's only major net oil exporter could fall short of the official target by the equivalent of about US$7 billion next year. The yield on the sovereign US currency Shariah-compliant notes that are maturing has climbed 25 basis points in 2015 to 1.62 per cent, the highest in more than two years.

"Despite some problems in its sovereign credit, Malaysia will easily sell US$1 billion to US$1.5 billion," said Sergey Dergachev, a senior money manager who helps oversee US$13 billion at Union Investment, which is "market weight" on the debt. "I assume many emerging-market sovereigns and corporates would like to make use of this cheap opportunity to still lock in low rates." Dergachev said he'll consider buying the bonds if valuations are good, and estimated a 20 to 25 basis-point premium over Malaysia's existing 2021 dollar Islamic notes assuming it's a five-year maturity. The 4.646 per cent debt yielded 3.03 per cent on Thursday. He said the government may tap investors early next year.

Angus Salim Amran, Kuala Lumpur-based head of financial markets at RHB Investment Bank, said a Malaysian 10-year sukuk may pay 160 basis points more than US Treasuries, which he put around 3.80 per cent when he was interviewed on Tuesday.

Global issuance of Shariah-compliant bonds has dropped 29 per cent in 2015 to US$34.2 billion, the poorest showing since 2010, according to data compiled by Bloomberg. Malaysia sold global Islamic bonds this year for the first time since 2011, and has a total of four foreign-currency sukuk outstanding and no conventional notes.

Overseas investors also seem optimistic, after raising holdings of the nation's sovereign and corporate ringgit debt to a seven-month high of 213.6 billion ringgit (S$69.6 billion) in November. They increased the proportion of government Islamic notes to a record 11.7 billion ringgit.

The recovery in foreign demand "may be an indication of the interest that investors are expected to exhibit in any sukuk offering by the government," said Helmi Abdul Jabar, head of project finance with the global investment banking division of OCBC Bank (Malaysia) Bhd. in Kuala Lumpur.

Asset sales by a debt-ridden state investment company may also help. 1Malaysia Development Bhd struck a deal last month to sell its power assets to China General Nuclear Power Corp for 9.83 billion ringgit. The firm had drawn criticism from lawmakers due to its 42 billion ringgit of debt and spooked investors when it almost defaulted on a loan in 2015. The government provided a 950 million ringgit credit facility in March to shore up its finances.

As the central bank sought to prop up the ringgit, Malaysia's foreign-exchange reserves sank 18 per cent this year to US$94.6 billion. The currency's rebound and 1MDB's progress in winding down its operations also brought down the cost to insure the nation's sovereign bonds from non-payment to 190 basis points from a six-year high of 247 in September.

Standard & Poor's analyst Kim Eng Tan said Wednesday that the company's stable outlook on its credit rating for Malaysia was unchanged despite the domestic and global developments. It rates the nation A-, the fourth-lowest investment grade.

"Fundamentally, investors are still positive on the longer- term prospects," said RHB's Angus. "I expect buyers to be made up mainly of structural investors who take a longer-term outlook on the sovereign rather than focus on current market weakness."

BLOOMBERG