The 2H24 debt capital market (DCM) issuance in Malaysia is likely to stay at similar levels to 1H24 or fall due to the government’s gradual fiscal consolidation, with the federal deficit expected to fall in the near term, Fitch Ratings says in a new report. Impetus it added could come from financial institutions and corporate issuances as they seek to refinance and diversify funding. Malaysia’s DCM expanded by 4.4% yoy to cross USD550 billion outstanding at end-1H24. The DCM faces risks from ringgit, rates, commodity price volatilities, and global geopolitical events.
“The Malaysian DCM is deep and well developed compared to other Organisation of Islamic Cooperation (OIC) countries, though it remains ringgit focused.” said Bashar Al Natoor, Global Head of Islamic Finance at Fitch Ratings. “Sukuk is likely to stay dominant in the DCM due to supportive ecosystem. Unlike most OIC countries, investors in Malaysia’s DCM are more diversified and include banks, provident and pension funds, Hajj funds, insurance and takaful operators, and fund managers.” Fitch rates USD16 billion of Malaysian sukuk, all investment grade, with issuers on Stable Outlook.
DCM issuance in 1H24 fell by 8.3% yoy to USD45.2 billion due to fiscal consolidation, with the government deficit in 1H24 lower than 1H23. Around 60% of 1H24 issuance was from the government and the rest from financial institutions, corporates, project finance, and others. Bank Negara Malaysia is providing regulatory flexibility for multilateral development banks to issue ringgit sukuk and provide ringgit financing to resident entities without prior approval.
A stronger ringgit could attract more non-resident holding of domestic government bonds (3M24 share: 21.3%). We expect the factors driving ringgit depreciation, including negative interest-rate differentials and portfolio investor sentiment, to wind down in 2H24. Government efforts to support the ringgit included encouraging government-linked companies to consistently repatriate foreign investment income and convert it to ringgit. In May, the central bank kept the Overnight Policy Rate at 3%, with the same likely through 2H24 and 2025.
