Malaysia attracting investors and issuers to its domestic bond market with tax incentives
Arabian Gulf borrowers are selling ringgit denominated Islamic bonds at a record pace in Malaysia to raise funds for expansion and take advantage of demand in the world’s biggest market for shariah-compliant bonds.
Issuance surged to $318m this year, the most since 2008 when Gulf companies started tapping the Malaysian market, data compiled by Bloomberg show.
Last year, $31.7m of debt was sold. Dubai’s government is “likely” to sell bonds next year and a Malaysian offering is a possibility, Abdulrahman Al Saleh, the director general of the emirate’s Department of Finance, said on December 14.
“More ringgit sukuk from Gulf issuers will mean having more liquidity in the market,” Zamri Shariff, the head of asset management at Asian Finance Bank, the Kuala Lumpur based unit of Qatar Islamic Bank, said in an email response to questions on Sunday. “That absolutely widens our scope for investment.”
Malaysia, which accounts for more than 50 percent of the $144bn Islamic bonds outstanding worldwide, is attracting investors and issuers to its domestic bond market with tax incentives.
The country’s 10 year economic strategy will help spur sales of sukuk and new debt offerings “may be cheaper, or else met by a high take up rate,” Prime Minister Najib Razak said on October 25. The government plans to cut taxes on shariah-compliant transactions in 2011 to promote “innovation in Islamic securities,” he said in an October 15 budget speech.
The ringgit rallied 8.9 percent against the dollar this year, the second best performance after the Thai baht, among 10 Asian emerging market currencies tracked by Bloomberg.
Shariah-compliant debt in the six nation Gulf Cooperation Council returned 12.9 percent this year, the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index shows. Global sukuk returned 12.2 percent, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Bonds in developing markets rose 11.4 percent, JPMorgan Chase & Co’s EMBI Global Diversified Index shows.
The Islamic Development Bank, a Jeddah, Saudi Arabia based multilateral lender, plans to sell more ringgit sukuk next year under its 10 year, 1bn ringgit debt program, Vice President Abdul Aziz Al Hinai said in an interview in Dubai on December 6. The bank has raised $127.1m through the notes.
Al Hinai said: “Asia for us is an important region to mobilize resources from,” and added: “When we issue in a currency like the ringgit, we look at the tradability of our sukuk, and the ringgit is very tradable.”
National Bank of Abu Dhabi, the UAE's second largest lender by assets, sold $158.9m of 10 year sukuk this month, drawing demand for more than $317.9m.
The debt was issued under a $953.8m senior unsecured medium term note program, the company said in an emailed statement on December 16.
The sale “reflects the commitment of NBAD to create a yield curve in the ringgit to meet the strong investor demand,” the bank said.
Total sales of Islamic bonds dropped 24 percent to $15.3bn so far this year, according to data compiled by Bloomberg. Sales of ringgit denominated sukuk in Malaysia fell 29 percent to $7.3bn. Offerings from the GCC declined 32 percent to $4.5bn.
Sovereign and sovereign linked sukuk from the Gulf will be favored over Islamic bonds offered by companies after debt restructurings, defaults and tumbling property prices hurt investors’ confidence, according to Aberdeen Asset Management.
“If it’s government backed they have a government guarantee, there’s some sort of element of comfort,” Abdul Jalil Abdul Rasheed, who helps to manage $150m of Islamic assets at Aberdeen Asset’s Malaysian unit, said in an email on Sunday.
The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s narrowed 45 basis points, or 0.4 percentage point, this month to 346, data compiled by Bloomberg show.
The yield on Dubai’s 6.3 percent sukuk maturing in November 2014 dropped 6 basis points to 6.5 percent on Sunday, according to Bloomberg data.
The yield on Malaysia’s five year 3.4 percent local currency Islamic notes due July 2015 fell 1 basis point on Sunday to 3.49 percent, according to Bursa Malaysia.
National Bank of Abu Dhabi 4.7 percent ringgit sukuk maturing June 2015 yielded 4 percent when the debt last traded on November 19, the data show.
The difference between the average yield for emerging market sukuk and the London interbank offered rate narrowed 61 basis points this month to 300 on December 17, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. In the GCC, which includes Qatar, the UAE and Kuwait, the gap shrank 67 basis points to 372.
“There are numerous buyers in Malaysia and Indonesia for GCC credits,” Usman Ahmed, a senior fund manager at Emirates NBD Asset Management, which oversees $300m of bonds at the unit of the UAE’s biggest lender, said in an interview on Sunday. “On the supply side, the Malaysian market is attractive for those issuers who are looking to place medium to long tenors.”