Malaysia continues lead in global sukuk market: RAM Ratings

The latest edition of RAM Ratings’ Sukuk Snapshot reports that the value of outstanding Malaysian sukuk edged up 0.24% to RM583.4 billion as at end-September 2015, from RM582 billion a month earlier. Overall, the issuance of corporate debt securities came up to RM60.7 billion in the first nine months of 2015, with sukuk making up 43% or RM25.9 billion.

"Sukuk continues to account for the bulk of the domestic debt capital market with 53.1% of the outstanding value,” observes Ruslena Ramli, RAM’s Head of Islamic Finance. Globally, outstanding sukuk summed up to USD292.1 billion as at end-September 2015, following USD6.2 billion of net issuance that same month. Notably, Malaysia maintained its lead with 52.9% (equivalent to US$154.5 billion) of the total outstanding value of global sukuk.

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Sukuk from Malaysia could help to fund Indonesian power projects

The ringgit sukuk market can be a viable funding option for the Indonesian power sector, suggests RAM Ratings.

The Indonesian power sector is estimated to require US$132.2 billion for power infrastructure development over the next 10 years. While Indonesia’s national electricity utility company Perusahaan Listrik Negara will continue to be the key facilitator, private investments via independent power producers are expected to play a prominent role.

The private investments are likely to take the form of export credit and support from multilateral lending agencies, RAM Ratings said. “With a healthy appetite for project bonds, the ringgit sukuk market can also be a viable funding option for the Indonesian power sector,” said Chong Van Nee, Co-Head of Infrastructure and Utilities Ratings, RAM Ratings. 

A ready pool of long-term investors, ample liquidity and an established sukuk framework are some of the advantages for Indonesian project managers thinking of relying on the ringgit bond market for funding. “We have seen Indonesian corporations tap the ringgit market and there could be room for Indonesian project financing funding, particularly power sector bonds, in the market,” said Chong.

RAM has published a report on the Indonesian power sector, Power Up or Power Out, as part of the ASEAN Power Series. The industry is characterised by its robust electricity demand growth (CAGR of 7.1% from 2004 to 2014) and a pressing need for rapid electrification in support of the country’s aggressive economic growth ambition. Despite its population of more than 250 million, Indonesia’s electrification ratio is deemed low – at 84.3% as at end-2014 – relative to most of its ASEAN neighbours. 

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Read the Suroor Asia blog post about RAM Ratings' findings on sukuk in the Malaysian power market.

Sukuk dominates in independent power producer bond issues in Malaysia

Based on RAM’s data and information gleaned from Bank Negara Malaysia's FAST (Fully Automated System for Issuing/Tendering) system, sukuk has become more prominent as part of power funding over the years, with more than 93% of independent power producer (IPP) bond issues comprising sukuk after 2000, compared to only 25% before that. 

“Power bonds have accounted for 39% of Malaysia’s RM239 billion of infrastructure bond issues in the last decade,” said Chong Van Nee, Co-Head of Infrastructure and Utilities Ratings, RAM Ratings. “Nearly all of Malaysia’s outstanding IPP bonds - amounting to RM28 billion - are sukuk issues.”

RAM Ratings notes that the Malaysian power industry has been one of most active sectors tapping the local bond market for its funding needs, with tenures ranging from 10 to 30 years. The observation is published in the maiden report in its ASEAN Power Series, Energising a steady growth path. 

The report presents RAM’s assessment of the power sector’s structure, regulatory landscape, capacity and fuel-supply situation, the key players and how these influence the industry’s growth and infrastructure funding.

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RAM Ratings shares outlook for new sukuk this year

RAM Ratings, which provides independent research and advisory services, anticipates that new global sukuk issuance will remain fairly resilient in 2015, with the market worth between US$100 billion and US$120 billion despite the challenging environment for Malaysia and the GCC amid the steep fall in global oil prices since last year. 

GCC sukuk issuers that typically tap the international markets could well delay their plans to the second half of 2015, until the full impact of soft oil prices and the possible effects on their credit standing can be digested by potential investors. Geopolitical risks in the GCC, Europe’s quantitative-easing programme and the much-touted rate increase by the US Federal Reserve this year have compounded the uncertainties for GCC sukuk issuers and their potential investors, the company said.

RAM Rating's opinion is that although ringgit-denominated sukuk issuance was rather slow off the block this year, issues from the infrastructure sector and financial institutions as well as some supply of Islamic securities from Bank Negara Malaysia are expected to keep Malaysia in the lead, with about 60-70% of the global sukuk market’s issuances. The stability of the sukuk market is also underpinned by sturdy demand from Islamic and conventional ringgit-mandated domestic institutional funds as well as Malaysian-domiciled Islamic banks that are less likely to be perturbed by external shocks.

“Beyond leading the global sukuk market, innovation is also Malaysia’s forte,” said Promod Dass, Deputy CEO of RAM Ratings. The Securities Commission Malaysia’s Sustainable and Responsible Investment (SRI) sukuk framework - launched in August 2014 - has allowed Malaysia to keep exploring new frontiers, he added. “Khazanah Nasional Berhad’s plans for an upcoming SRI sukuk will be another milestone for Malaysia in this arena,” he said.

Meanwhile, issues involving shari'ah interpretation, the standardisation of documentation, tax treatment and the still-developing legal and regulatory frameworks to support sukuk in different jurisdictions are a few of the hurdles that global issuers and investors have to contend with when deciding between sukuk and conventional bonds. These factors tend to segmentalise the global sukuk market and limit the pace of cross-border issuance, RAM Ratings said. 

Notably, the Malaysian sukuk market has played host to many well-known GCC-based issuers, which have been raising ringgit-denominated sukuk since 2008. This highlights how regulatory requirements as well as a supportive legal and tax environment in a particular market can foster cross-border sukuk growth. 

“Perhaps the next leap for global sukuk will materialise when GCC sovereign wealth funds, which are among the world’s largest, reallocate more of their portfolios to invest in sukuk from Asia, Europe, the US and other non-OIC* nations. Issuers from non-OIC nations that typically do not opt for sukuk could then be more convinced to explore this route for funding diversity, once they see this seismic shift,” observes Promod.

Click here to download our Standpoint Commentary, Global Sukuk Outlook 2015.

Read our blog post on the sukuk outlook from KFH Research here.

*Organization of Islamic Cooperation