Corporate, sovereign refinancings to drive Malaysia sukuk volumes

The volumes will be stable, too.

Moody's Investors Service has noted that corporate and sovereign refinancing of maturing bonds will drive stable sukuk issuance volumes in Malaysia in 2015.

According to a release from Moody's Investors Service, it expects total sukuk bond issuance in Malaysia to be at or slightly lower in 2015 when compared with the $20 billion seen in 2014.

This is given Malaysia's adherence to its policy of fiscal deficit reduction, against the backdrop of weak commodity prices and foreign exchange volatility.

"Malaysia's declining share of global issuance reflects the increasing internationalization and diversity of Islamic capital markets," says Khalid Howladar, Moody's Global Head of Islamic Finance.

Here's more from Moody's Investors Service:

"As for Islamic banks in Malaysia, overall loan growth, including for Islamic financing, will slow slightly to 8%-9% in 2015 from 10% in 2014, reducing the banks' need for new funding, because asset growth will moderate, due to the country's slower economic growth," says Simon Chen, a Moody's Vice President and Senior Analyst for the Financial Institutions Group.

Chen points out that at the same time, Islamic banks will continue to apply sukuk in addressing the significant maturity mismatches between their assets and liabilities, and to improve liquidity management in the context of Basel III.

Moody's analysis is contained in its just-released report titled "Islamic Finance: 2015 Malaysian Sukuk Volumes Will Be Stable, Driven by Refinancing", and is co-authored by Howladar, Chen, Christian de Guzman, a Vice President and Senior Analyst for the Sovereign Risk Group, Nidhi Dhruv, an Assistant Vice President and Analyst, as well as Associate Analysts Vincent Tordo and Maisam Hasnain. Dhruv, Tordo and Hasnain are Islamic finance specialists in the Corporate Finance Group.

Moody's report says that in 2015, corporate sukuk issuance will remain dominated by Malaysian government-related issuers, as such issuers continue to tap and further deepen the Malaysian sukuk market.

Moody's report also says that around $44 billion of Malaysian sukuk will mature in 2015-17, with corporate and sovereign issuers needing to refinance almost 90% of the total amount. Financial institutions account for the remaining $4.6 billion. Of the $44 billion, only about 6% are denominated in US dollars, with the rest in ringgit; highlighting the depth of the domestic market.

As for the Malaysian sukuk market in relation to the overall global sukuk market, the former's share of volumes is declining. At 31 March 2015, some 58% of the approximately $308 billion of total sukuk outstanding were issued in Malaysia versus a 40% issuance share in 2014. The remaining issuance is increasingly fragmented; reflecting increased volumes from other Islamic markets, particularly the Arabian Gulf countries.

Moody's expects this trend of increased volumes from other Islamic markets to continue.

Moody's report points out that despite the rapid growth of other sukuk markets, Malaysia remains the largest and most liquid market, with a deep institutional investor base.

The report says that while other sovereigns have been keen to support the growth of Islamic finance in their jurisdictions, it is unlikely over at least the next five years that any other market — except perhaps Saudi Arabia — will match the depth and breadth of Malaysia's domestic sukuk market, given the lead gathered from over a decade of sustained issuance, and the extensive and coordinated policy support from Malaysia's central bank and all other stakeholders in the country.

Moody's report further points out that future growth in issuance in Malaysia will be driven by: (1) strong demand from local investors; (2) coordinated and supportive policies from the government for Islamic finance; (3) the large and growing base of Shari'ah-compliant corporates in Malaysia; and (4) global investors' increasing familiarity and comfort with sukuk instruments and increasing appetite for Malaysian credit.