Strong demand for Malaysia's international sukuk shows investor interest in sustainability finance, says Moody's

Strong demand for Malaysia's international sukuk shows investor interest in sustainability finance, says Moody's
-A +A

KUALA LUMPUR (April 27): Strong demand for Malaysia's sovereign international sustainability sukuk shows investor interest in sustainability finance and a credit positive to the government, said Moody's Investors Service.

“The increased issuance, which was originally slated for just US$1 billion (about RM4.1 billion) combined, in part reflects investor interest in sustainability linked, syariah-compliant products.

“This issuance will pave the way for other Malaysian issuers to tap into this funding base to address environmental, social and governance (ESG) concerns,” the rating agency said in a note today.

The government on April 22 issued two tranches of its first sovereign international sustainability sukuk, comprising US$800 million with 10-year trust certificates and US$500 million with 30-year trust certificates.

Moody's said the issuance was credit positive to the government as the addition of a new avenue of financing further anchored its already low liquidity risk through diversifying the country’s creditor base and keeping funding costs low.

“The issuance also reinforces Malaysia’s leading position in Islamic finance,” it said.

Since issuing the world’s first sukuk in 1990, the country has become the largest sukuk market in the world, accounting for 32% of total global sukuk issuances in 2020.

Malaysia is also one of the few sovereigns globally for which sukuk is an important instrument through which deficit financing needs are met, it said.

Moody's assessed Malaysia's exposure to environmental risk to be moderate, reflecting the government’s exposure to petroleum-related income, which accounts for around a fifth of its total revenue.

It said the focus on social projects supports its view that the country's exposure to social risk is neutral to low, reflecting favourable demographics, access to quality education, housing, healthcare and basic services, as well as policies that address needs of the bottom 40% income group (B40) category, which mitigate income inequality.

“These strengths help offset social issues that could arise from systematic policies that are designed to promote economic interests of the ethnic Malay (bumiputera) majority, including the use of quotas in university admissions, public service recruitment, housing and other areas,” it added.

Moody's opined that strong interest in international sustainability sukuk, which resulted in relatively low yields of 2.07% for the 10-year trust certificates and 3.075% for the 30-year trust certificates at issuance, also demonstrated Malaysia’s ability to access market financing in reserve currencies.

This complements its access to deep domestic capital markets, supporting the rating agency’s assessment of the government's low liquidity risk even as financing needs rise because of wider fiscal deficits.

“We forecast the government's fiscal deficit to be around 6% of gross domestic product (GDP) in 2021, narrowing to about 5% in 2022-23, but still wider than deficits of around 3% to 4% before the pandemic,” it added.

Moody's added that besides expanding its financing options, the government's issuance also set a benchmark for other Malaysian issuers seeking to tap international investors for ESG products.