Islamic finance: Malaysia beats Indonesia on sukuk safety
Malaysia’s dollar Islamic bonds are giving twice the returns of those in Indonesia this year as investors seek investment-grade assets amid unrest in the Middle East and Europe’s escalating debt woes.
Malaysia’s 3.928 per cent sukuk maturing in June 2015 gained 1.9 per cent this year through April 19, according to prices from Royal Bank of Scotland Group. Indonesia’s 8.8 per cent note due April 2014 climbed 0.8 per cent, RBS data show. Malaysia is rated A- by Standard & Poor’s, the fourth-lowest investment level, while Indonesia is rated BB+, one level short of the top grades.
Malaysia has become the global hub for the US$1 trillion Islamic finance industry as the government provided tax incentives and eased foreign-investment rules to promote growth. Prime Minister Najib Razak predicted the nation’s Shariah- compliant assets will almost triple to RM2.9 trillion (US$964 billion) this decade when he unveiled the capital-market master plan April 12.
“Concerns about the global economic recovery due to turmoil in the Middle East and the debt crisis in Europe led to a general flight-to-quality,” Zeid Ayer, portfolio manager at Kuala Lumpur-based CIMB-Principal Islamic Asset Management Bhd., said in an interview yesterday.
“There’s probably greater confidence investing in Malaysia compared to Indonesia.”
The extra yield investors demand to hold Indonesia’s debt over Malaysia’s widened 20 basis points, or 0.20 percentage point, from a three-month low on April 11 to 42 today, according to data compiled by Bloomberg. It reached 52 on April 18, the highest since March 23, as concerns over the ability of European nations to repay debt resurfaced.
The yield on the Greek government’s two-year non-Islamic bond surged above 20 per cent this week as Germany, the biggest contributor to Europe’s bailout, urged the nation to restructure its debt and reduce the budget deficit. Lars Feld, a member of German Chancellor Angela Merkel’s council of economic advisers, said yesterday Greek restructuring is probable.
Indonesia’s Islamic note looks expensive given its non- investment grade rating and Malaysia’s bond is more actively traded, said Zeid, whose company is a unit of CIMB Group Holdings Bhd, the top sukuk underwriter last year.
Overseas investors will focus more on Indonesia’s credit standing than the appreciation of the currency during times of risk aversion, said Mohd Farid Kamarudin at Kuala Lumpur-based AmInvestment Management Sdn Bhd Indonesia’s rupiah strengthened 4.1 per cent this year, the second-best performance in Asia, according to data compiled by Bloomberg. The Malaysian ringgit climbed 1.9 per cent, the fourth-best performance.
“There could be some upside if Indonesia gets a ratings upgrade,” Mohd Farid, who helps manage RM1.3 billion of Islamic assets at AmInvestment Management, said in an interview yesterday.
Malaysia’s Islamic banking assets grew 16 percent last year to RM350.8 billion, according to Bank Negara Malaysia’s annual report published on March 23. Assets that comply with Shariah law in Indonesia expanded to 100.3 trillion rupiah (US$11.6 billion) as of Dec. 31, 2010, from 67 trillion rupiah a year earlier, data from Bank Indonesia’s website showed.
Global sales of sukuk, which pay returns on assets to comply with Islam’s ban on interest, rose to US$4.6 billion this year from $4 billion in the same period of 2010, according to data compiled by Bloomberg.
“The Malaysian sukuk market is by far the largest and most liquid in the world and that makes it relatively more attractive to investors,” John Bates, the London-based head of fixed income at Silk Invest Ltd, said in a response to e-mailed questions yesterday.
Shariah-compliant bonds returned 3.7 per cent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Debt in developing markets gained 1.6 per cent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.
The difference between the average yield for sukuk and the London interbank offered rate narrowed 12 basis points to 242 basis points on April 20, according to the HSBC/NASDAQ Dubai U.S. Dollar Sukuk Index. Average yields fell six basis points to 4.29 per cent.
The Bloomberg-AIBIM-Bursa Malaysia Sovereign Shariah Index, which tracks the most traded ringgit-denominated bonds, was unchanged at 101.9370 yesterday. The gauge has climbed 0.8 percent this year. The difference in yields between Malaysia’s sukuk and the Dubai Department of Finance’s 6.396 per cent note due November 2014 declined five basis points to 243 an April 20, Bloomberg data show.
“The regulatory framework in Malaysia is more conducive for foreign investors because they’ve relaxed capital controls,” Najmi Mohamed, a Kuala Lumpur-based senior fixed- income manager at AmanahRaya Investment Management, which oversees RM5.3 billion of assets, said in an interview yesterday. - Bloomberg/21Apr2011