Sukuk funds give Malaysia lifeline amid deficit

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KUALA LUMPUR (Jan 22): 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 percent, versus 4.22 percent in the secondary market. Bids totaled 2.53 times the 4 billion ringgit ($1.1 billion) on offer, the strongest demand since August. The ringgit fell 1 percent on Jan. 20 when Najib raised the deficit goal to 3.2 percent of gross domestic product from 3 percent.

A plan by Barclays Plc 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 Bhd. and Malayan Banking Bhd. 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 Bhd.’s Fakrizzaki Ghazali in Kuala Lumpur.

“The market is taking that as a comfort to be more active in government bonds, particularly sukuk,” Fakrizzaki, a credit strategist at RHB Research Institute Sdn., a unit of RHB Capital, said by phone yesterday. “If you look at the levels for the seven year, something which is above 4 percent may look attractive.”

Barclays Index

Malaysia has been hit by a 57 percent 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 percent to 5.5 percent, 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 31 basis points to 137 since Dec. 31, CMA prices show. While that’s more than 112 in Thailand and 96 in the Philippines, it’s less than Indonesia’s 158.

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

The prime minister has embarked on a 10-year, $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 percent, the U.K. lender said in a research note on Jan. 13, estimating the move will attract at least $2.5 billion to $3 billion.

‘Sustain Demand’

“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 Bhd., said by phone yesterday. “Borrowing costs in Malaysia should be contained by rising expectations of the central bank holding rates.”

The Southeast Asian nation’s Islamic banking assets increased 9.7 percent to a record 580.8 billion ringgit in July from a year earlier and accounted for 25 percent 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 13 basis points, or 0.13 percentage point, to 4.24 percent in the past month, according to a Bank Negara index. The yield on five-year securities dropped four basis points to 3.99 percent.

“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 yesterday. “There could be some foreign inflows because of the inclusion of sukuk in the Barclays index but that may not happen too soon.”