First sustainability sukuk a credit positive for Malaysia

Sukuk issuance

PETALING JAYA: The world’s first sovereign sustainability sukuk issued by Malaysia, which has received overwhelming response from global investors, is credit positive for the government.

According to Moody’s Investors Service, the addition of a new avenue of financing via the sukuk further anchors the government’s already low liquidity risk through diversifying the country’s creditor base and keeps funding costs low.

“This will pave the way for other Malaysian issuers to tap into this funding base to address environmental, social and governance (ESG) concerns.

“The issuance also reinforces Malaysia’s leading position in Islamic finance, ” said Moody’s in a report yesterday.

On April 22, the government had issued two tranches of its first sovereign international sustainability sukuk, comprising US$800mil (RM3.3bil) 10-year trust certificates and US$500mil 30-year trust certificates.

The increased issuance – which was originally slated for just US$1bil in value combined – in part reflects investor interest in sustainability linked, syariah-compliant products, according to Moody’s.

Since issuing the world’s first sukuk in 1990, Malaysia has become the largest sukuk market in the world, accounting for 32% of total global sukuk issuance in 2020.

Malaysia is also one of the few countries globally that use sukuks as an important instrument to meet their deficit financing needs.

“The strong interest for the international sustainability sukuk, which resulted in relatively low yields of 2.07% for the 10-year trust certificates and 3.075% for the 30-year trust certificates at issuance, also demonstrates Malaysia’s ability to access market financing in reserve currencies.

“This complements its access to deep domestic capital markets, supporting our assessment of the government’s low liquidity risk even as financing needs rise because of wider fiscal deficits.

“We forecast the government’s fiscal deficit to be around 6% of gross domestic product in 2021, narrowing to about 5% in 2022 to 2023, but still wider than the deficits of around 3% to 4% before the pandemic, ” said Moody’s.

The ratings agency expected some of the projects included in the government’s Budget 2021 to be financed by proceeds from the sukuk issuance.

Based on its assessment, Moody’s said Malaysia’s exposure to environmental risk is moderate, reflecting the government’s exposure to petroleum-related income, which accounts for about a fifth of total revenue.

A global transition away from hydrocarbon fuels threatens the long-term viability of this income stream.

Malaysia is also exposed to deforestation stemming from the expansion of palm oil plantations and mining and logging activity, which contributes to flooding.

Hence, green projects that effectively address some of these vulnerabilities can help reduce Malaysia’s exposure to environmental risk.

Meanwhile, the ratings agency said that Malaysia’s exposure to social risk is neutral to low.

This view reflected favourable demographics, the access to quality education, housing, healthcare and basic services, as well as policies that address the needs of the bottom 40% (B40) population, which mitigate income inequality.

“These strengths help to offset social issues that could arise from systematic policies that are designed to promote the economic interests of the ethnic Malay majority, including the use of quotas in university admissions, public service recruitment, housing and other areas, ” said Moody’s.