Sukuk funds give Malaysia lifeline amid deficit: Islamic Finance

[KUALA LUMPUR] Sukuk investors are maintaining support for Malaysian Prime Minister Najib Razak as he sacrifices budget deficit targets to sustain development spending.

Funds accepted a lower yield when the nation kicked-off 2015's Islamic bond issuance on Jan 14, even as slumping oil prices strained government finances. The seven-year debt was sold at 4.19 per cent, versus 4.22 per cent in the secondary market. Bids totaled 2.53 times the 4 billion ringgit (US$1.1 billion) on offer, the strongest demand since August. The ringgit fell 1 per cent on Jan 20 when Mr Najib raised the deficit goal to 3.2 per cent of gross domestic product from 3 per cent.

A plan by Barclays to include Malaysian sovereign sukuk in its benchmark global index will widen the investor base and bring in more overseas cash, according to CIMB Group Holdings and Malayan Banking. Najib's cut to the economic growth forecast and receding odds for a central bank rate increase are also supportive for bonds, said RHB Capital's Fakrizzaki Ghazali in Kuala Lumpur.

"The market is taking that as a comfort to be more active in government bonds, particularly sukuk," Mr Fakrizzaki, a credit strategist at RHB Research Institute, a unit of RHB Capital, said by phone Wednesday. "If you look at the levels for the seven year, something which is above 4 per cent may look attractive." Barclays Index Malaysia has been hit by a 57 per cent plunge in crude prices since June that's crimping revenue for Asia's only major oil exporter. Najib cut the 2015 growth forecast on Jan. 20 to 4.5 per cent to 5.5 per cent, from an October projection of as much as 6 percent.

The cost to insure the nation's sovereign debt for five years using credit-default swaps has climbed 30 basis points to 136 since Dec 31, CMA prices show. While that's more than 111 in Thailand and 97 in the Philippines, it's less than Indonesia's 156.

RHB and Maybank predict the central bank will keep its benchmark policy rate at 3.25 per cent throughout 2015 after July's first increase in more than three years.

The prime minister has embarked on a 10-year, US$444 billion spending program to build roads, railways and power plants in an effort to boost the economy. Malaysia will reduce its 2015 operating expenditure by 5.5 billion ringgit while maintaining the allocation for development, Najib said in a televised address announcing the data revisions.

Malaysia's Shariah-compliant government investment issues, or GIIs, will be included in the Barclays Global Aggregate Index on March 31, with a weighting of 0.18 per cent, the UK lender said in a research note on Jan 13, estimating the move will attract at least US$2.5 billion to US$3 billion.

"The ample liquidity in the Islamic market and the inclusion of the government sukuk in the Barclays index will help sustain demand," Nik Mukharriz Muhammad, a Kuala Lumpur- based fixed-income analyst at CIMB Investment Bank, said by phone Wednesday. "Borrowing costs in Malaysia should be contained by rising expectations of the central bank holding rates." The nation's Islamic banking assets increased 9.7 per cent to a record 580.8 billion ringgit in July from a year earlier and accounted for 25 per cent of the overall market, according to an October Finance Ministry report. The most up-to-date numbers are usually published in March each year.

Sales of Islamic bonds in Malaysia, the world's biggest sukuk market, climbed to 62 billion ringgit in 2014, the second highest after 2012's record 95.8 billion ringgit, data compiled by Bloomberg show. There's been no issuance so far this year.

Ten-year government sukuk yields fell 11 basis points, or 0.11 percentage point, to 4.26 per cent in the past month, according to a Bank Negara index. The yield on five-year securities dropped four basis points to 3.99 per cent.

"Currently, demand for Shariah-compliant bonds is still quite good," Winson Phoon, a Kuala Lumpur-based fixed-income analyst at Maybank Investment Bank Bhd., a unit of Maybank, said by phone Wednesday. "There could be some foreign inflows because of the inclusion of sukuk in the Barclays index but that may not happen too soon."

BLOOMBERG