Ringgit stabilising attracts RHB Islamic to longer-dated sukuk

[KUALA LUMPUR] RHB Asset Management Sdn's Islamic unit is buying into a rally in Malaysia's longer-term sukuk, betting foreign investors will return to ringgit debt.

RHB Islamic International Asset Management Bhd is favoring the sovereign and corporate debt in maturities of seven to 10 years, chief executive officer Sharizad Juma'at said in an interview. The company sees limited currency weakness in 2016 and expects the key central bank rate to remain unchanged, she said in Kuala Lumpur.

"The ringgit will be quite stable within the weak environment" of slower growth in China and Europe, said Ms Sharizad.

"Since the US economy has shown a lot of improvement but may not be strong enough for the Federal Reserve to increase interest rates, you may find the money come back again to Malaysia."

The ringgit is outperforming most Asian counterparts in 2016 after posting the biggest slump last year, and stabilising crude prices are brightening the oil exporter's outlook.

A guarantor of troubled state investment company 1Malaysia Development Bhd.'s bonds stepped in to make a second interest payment on Wednesday, after delaying its obligation on another note in April. The cost to insure the nation's sovereign debt has dropped this year and overseas holdings of government bonds climbed to a record.

Yields on the notes RHB is picking already fell faster than those on shorter-term securities this year. Ten-year yields on Malaysian sukuk declined 45 basis points to 4.07 per cent and reached the lowest since June last month. That on the seven-year debt dropped only 39 basis points to 3.93 per cent.

Infrastructure Sukuk

RHB also has "quite a big exposure" to infrastructure sukuk, Ms Sharizad said, without giving details. Prime Minister Najib Razak's US$444 billion development program to build roads, power plants and railways expires this decade. Many of the projects have been farmed out to private-sector companies who have sold Islamic bonds for financing.

Some 30 per cent of the RM5 billion (S$1.64 billion) RHB Islamic oversees is invested in Shariah-compliant stocks and the rest is in cash and bonds that comply with Muslim tenets, Ms Sharizad said.

The ringgit has appreciated 6 per cent this year, the most in Asia after the yen. It slumped 19 per cent in 2015 as oil prices collapsed. The currency is likely to trade around 4.10 to 4.20 per US dollar this year, Ms Sharizad said.

That compares with 4.0350 at the close on Wednesday and the year-end median forecast in a Bloomberg survey of 4.07.

Sarawak Victory

Fitch Ratings said in a statement this week that the risk to Malaysia's credit profile from 1MDB comes more from the potential impact on the policy focus or if it contributes to political instability.

Prime Minister Najib has come under criticism because of the state firm's debt and a personal donation from the Saudi royal family, leading to calls for him to step down. He has consistently denied any wrongdoing.

Mr Najib's Barisan Nasional party won a majority in a state election in Sarawak on the island of Borneo at the weekend, which Fitch said shows the spillover effect from 1MDB on politics remains contained. He chairs 1MDB's advisory board, which is due to be dismantled at the end of May.

1MDB's bonds surged Wednesday after Abu Dhabi's sovereign wealth fund paid a US$52.4 million interest payment due on 5.99 per cent dollar notes it had co-guaranteed.

International Petroleum Investment Co was also in the spotlight in April when it refused to make a similar commitment on a 5.75 per cent paper because of a dispute with 1MDB over a loan it made. The Malaysian firm effectively then went into default before IPIC met the obligation.

Global funds purchased RM7.8 billion of Malaysian sovereign bonds in April, boosting their total ownership to a record RM194 billion. They've added to holdings for seven straight months. Overseas investors pulled RM30.6 billion from the nation's debt and stocks in 2015.

"Strategically, we are overweight duration," said Ms Sharizad.

"The market is a little bit more visible even though there's a lot of volatility everywhere."

BLOOMBERG