The Bank Negara Malaysia Building in Kuala Lumpur at night. The central bank hasn’t sold any Islamic securities due in three to 12 months in 2015, after issuing 146bn ringgit ($38.4bn) of the bills last year.
Bloomberg/Kuala Lumpur
Malaysia is cutting sales of Shariah-compliant bills in the world’s biggest Islamic debt market, prompting Standard & Poor’s to halve its forecast for global sukuk issuance.
Bank Negara Malaysia hasn’t sold any Islamic securities due in three to 12 months in 2015, after issuing 146bn ringgit ($38.4bn) of the bills last year, central bank data show. While the monetary authority said in a statement that outstanding issuance of sukuk has decreased, it’s now focusing on shorter-dated maturities in both the Shariah-compliant and conventional money markets to help banks manage cash flows.
S&P, which predicts worldwide sukuk sales will drop to a maximum of $60bn this year from an earlier projection of as much as $115bn, said it understands Bank Negara has switched to short-term Islamic securities that can only be bought by Malaysian lenders. The measure may be aimed at trimming exposure to sudden sales of debt by overseas investors and ensuring adequate liquidity as the US prepares to raise interest rates, according to Maybank Investment Bank Bhd.
“If Bank Negara had kept the sizable foreign holdings of BNM notes, it would run the risk of a sudden and massive selloff,” said Winson Phoon, a Kuala Lumpur-based fixed-income analyst at the unit of Malaysia’s biggest bank. “Now it appears more gradual.”
Global investors raised holdings of Malaysian debt, ranging from government bonds to corporate notes, by 1.7% to 211.9bn ringgit in June from the previous month, with 77.9% held in short-term instruments, including Bank Negara notes and treasury bills, according to a July 8 research report from Maybank Investment.
The central bank’s switch contributed to 13.9bn ringgit of outflows from Malaysia’s debt market in the first six months of 2015, including Islamic and conventional securities, Phoon wrote in the note. The ringgit plunged 7.4% against the dollar in that period, Asia’s worst-performing currency, and weakened to a 16-year low this month.
“With the evolving global and domestic liquidity condition, more shorter-dated monetary instruments have been used to manage liquidity both in the conventional and Islamic money market,” according to Bank Negara’s July 9 statement, which was confirmed by phone as meaning issuing more maturities of three months or less. It didn’t offer any further details aside from citing alternative investments such as Government Investment Issues, known as GII, and Sukuk Perumahan Kerajaan used to finance housing loans of civil servants.
“I don’t think the time is ripe to reduce Islamic note” offerings, said Azidy Daud, head of treasury at Asian Finance Bank Bhd. in Kuala Lumpur. “People are still clamouring for assets for liquidity coverage.”
S&P estimated in a July 7 report that worldwide sukuk sales fell 42.5% in the first half of 2015 from a year earlier after Bank Negara reduced its bill sales. The central bank accounted for $45bn of the total $116.4bn issuance in 2014, Mohamed Damak, global head of Islamic Finance, wrote in the article.
When the impact of the reduction in Malaysia’s short-term instruments is excluded, global Islamic bond issuance dropped 10.7%, according to the S&P report. That confirms the impact of falling oil prices on government spending and investment projects in the core markets, predominately Malaysia and the Gulf Cooperation Council, was limited in the first half, it said.
“The move to stop the issuance of three- to 12-month bills won’t have much impact on Islamic banks,” said Suzaizi Mohd Morshid, Kuala Lumpur-based head of treasury at RHB Islamic Bank Bhd, a unit of RHB Capital Bhd. “Bank Negara has many instruments that it can use to manage liquidity in the banking system.”
