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Malaysia's infrastructure push to keep sukuk issues steady

Data show Islamic finance made up 60% of $31 billion raised via debt last year

KUALA LUMPUR (Nikkei Markets) -- Malaysia's continued infrastructure push amid a steady economic growth is likely to keep issuance of sukuks steady this year and cement the Southeast Asian nation's position as one of the biggest players in global Islamic finance market.

"We expect Malaysia to continue its momentum in sukuk issuances in both the corporate and sovereign bond space," said Kenanga Investment Bank's Executive Director Roslan Tik, "given the increase in funding requirements by corporates as well as the rise in infrastructure projects."

Muslim-majority Malaysia, widely considered as a pioneer in Islamic financing, has for decades relied on sukuks to raise cheap capital to fund large infrastructure projects that typically power economic activities. The Malaysian unit of Shell first issued sukuk in 1990 and since then the government and corporates have embraced the instrument among other Islamic finance products to raise cash to fund growth. Malaysia plans to build East Coast Rail Line, its largest railway project to-date at an estimated cost of 55 billion ringgit ($13.5 billion), and a high-speed rail connecting Kuala Lumpur and Singapore. The government is also expanding the various urban rail networks in the capital city.

Islamic financing differs from conventional financing in its compliance with Shariah, or Islamic law that among others bans the charging of interest and speculation. Islamic bond replaces coupons with payouts derived from profit-generating tangible assets, such as leases or a joint venture.

A head-start has helped Malaysia strengthen regulatory framework for Islamic financing and a public policy that consciously seeks to boost the asset class has deepened the sukuk market. Strong backing by long-term investors such as state-run Muslim pilgrims fund board Lembaga Tabung Haji and innovative products such as Socially Responsible Investment sukuk issued by state investment agency Khazanah Nasional have helped broaden the market, attracting several foreign and local investors. Malaysia also was the first market to issue so-called Green Sukuk in 2017.

Data from capital markets regulator Securities Commission Malaysia show that value of sukuk, including sovereign and corporate notes outstanding in the first 11 months of last year totalled 751.32 billion ringgit, ($186.6 billion), which was 40.5% of the total Islamic capital market in Malaysia. That topped the 661.08 billion ringgit worth of sukuks outstanding in 2016 and was also higher than the 607.93 billion ringgit worth of outstanding Islamic bonds 2015, which suggests a continued expansion in Malaysia's sukuk market. The Islamic capital market in the first 11 months of 2017 amounted to 1.85 trillion ringgit, which was 59.5% of total Malaysian capital market.

Malaysian issuers raised $31 billion from 199 deals in the debt capital market in 2017 with Islamic financing making up more than 60% of the total amount raised, according to data from Dealogic.

Large Malaysain corporates and government-backed agencies have established sukuk programs to tap into the capita market.

In September, a 51%-owned unit of Malaysia's national electricity company Tenaga Nasional planned to set up a sukuk program to raise up to 4 billion ringgit. IHH Healthcare, Asia's largest listed hospital operator by market value, in July established a $2 billion multi-currency medium term note program.

Cagamas, Malaysia's national mortgage firm and the country's largest issuer of debt instruments, ended 2017 with 23 issuances totalling 15.3 billion ringgit. "We remain positive as we move towards 2018," Cagamas CEO Chung Chee Leong said in a Dec. 29 statement.

This year, gross corporate issuance could moderate to 90 billion ringgit-100 billion ringgit, predicts local ratings agency RAM Ratings. "The bond market is still anticipated to experience outflow pressures next year, stemming from external developments such as future monetary policy tightening by the U.S. Fed."

Hawkish statements by Malaysia's central bank suggesting increase in overnight policy rate following robust economic growth in the third quarter have helped to sustain inflow into Malaysian bonds. Foreign ownership of Malaysian government bonds rose to 44.3% from 42.7% in October.

Bank Negara Malaysia has kept the benchmark interest rate unchanged at 3.00% since lowering it by 25 basis points in July 2016. Economists believe accelerating economic growth, clocking in at 6.2% in the third quarter, paved the way for BNM to raise rates to curb inflationary pressure in 2018.

In November, the central bank said while the economy was on track for 5.2%-to- 5.7% growth in 2017, it was also possible for the growth rate to top the upper limit of the forecast.

--Jason Ng

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