Malaysia's need for financing will keep sukuk market afloat: Moody's

Sovereign sukuk issuance soared 39.2% on COVID-related budget pressures in H1.

The Malaysian government’s need to finance stimulus measures and revenue shortfalls amidst the coronavirus recession will mitigate the decline in the country’s domestic sukuk issuance, reports Moody’s Investors Service.

Domestic sukuk issuance in H1 2020 fell 8% YoY compared to the same period last year, with private-sector issuance down 28.8% as companies delayed or canceled investment plans, noted Christian de Guzman, a Moody’s Senior Vice President.

Meanwhile, sovereign issuance was up 39.2% on coronavirus-related budget pressures and refinancing needs.

Moody's expects the sovereign sukuk issuance to continue through the rest of 2020 amidst improving market conditions and the government's sizeable borrowing requirements.

“Stimulus spending to support the economy will widen the federal government's deficit to around 6% of GDP in 2020, up from 3.4% last year. Along with maturing debts, the government will need to raise about $21.44b (MYR90b), or around 6% of GDP, in the second half of the year,” the report read.

Further, narrowing spreads between the government's outstanding conventional and sukuk obligations, as well as the sukuk's greater resilience to nonresident investor sentiment, will allow the government to meet its strategy of balancing issuance evenly between sukuk and conventional debt instruments, according to Moody’s.

Stable demand will also help absorb the larger supply of sovereign sukuk and limit liquidity risks.

“The primary holders of government sukuk — the banking sector and the compulsory provident fund — have comfortably absorbed both the government's large issuance volume and the sell-off from nonresident investors in the first half of the year,” the report stated.

Strong banking system liquidity and central bank intervention will support stable demand for sovereign sukuk in the second half of the year, despite an uncertain economic outlook, it added.