Malaysia’s state oil company is enjoying a twin boost as commodity prices rally and Islamic bond costs fall just as it considers borrowing.
The difference in yield between 10-year government sukuk and two-year securities shrank to a five-month low of 91 basis points last week from as high as 128 in early January, making longer-term financing attractive for issuers such as Petroliam Nasional Bhd. That’s been helped by record foreign purchases of ringgit government bonds last month, a rally in the currency and a recovery in Brent crude.
Petronas last month posted its third loss in five quarters, announced plans to cut 1,000 jobs and said it may need to raise funds and tap cash reserves to cover capital expenditure and dividends. The decline in bond costs is also a bright spot for Prime Minister Najib Razak, who’s seeking to finance a $444bn development plan while contending with slowing growth.
“The flattening yield curve reflects the general perception that the pace of domestic economic growth won’t be strong,” said James Lau, a Kuala Lumpur-based investment director at Pheim Asset Management Asia Bhd. overseeing $300mn. “The sweet spot remains for companies, especially those involved in development projects, to tap the loan and debt markets.” Azman Ibrahim, a Petronas official, couldn’t immediately be reached for comment by phone or e-mail late on Monday.
Corporate sales of bonds that prohibit the payment of interest more than doubled in Malaysia to 9.6bn ringgit ($2.3bn) in 2016 from a year earlier, according to data compiled by Bloomberg. The ringgit rallied 4.7%, the best performance among 24 emerging-market currencies after Indonesia’s rupiah and the Brazilian real.
Overseas investors increased holdings of Malaysian sovereign ringgit bonds to an unprecedented 176.7bn ringgit in February from the previous month as a global sell-off in equities at the start of the year boosted demand for fixed- income securities. When accounting for company notes, total ownership fell 0.6% to 215bn ringgit.
“Demand-supply dynamics for Islamic bonds will stay favorable from the shift in asset allocation given the weakness seen in equities and other asset classes,” said Fakrizzaki Ghazali, a Kuala Lumpur-based strategist at RHB Research Institute Sdn. “Nonetheless, this may not be a one-way affair as markets could be highly volatile again.”
The 10-year Shariah-compliant yield fell 41 basis points in 2016 to a seven-month low of 4.11%, almost six times as fast as the decline on the equivalent two-year debt, according to Bank Negara Malaysia indexes.
The possibility the central bank may ease monetary policy this year may also further support demand for bonds. Bank Negara unexpectedly cut the statutory reserve requirement for lenders at its last meeting in January and kept the benchmark interest rate at 3.25%. It’s also forecast by all 19 economists in a Bloomberg survey to hold the rate today.
Bank Negara expects inflation to tick higher to 2.5% to 3.5% this year from 2.1% in 2015 even as economists bet growth will weaken to 4.4%, the slowest since a contraction in 2009.