DESPITE the current turmoil in Europe and shaky prospects for the
global economy, Standard & Poor's Ratings Services maintains a
strong outlook for Malaysia's bond market. Our view reflects: positive
bond market developments, ongoing growth in Islamic finance, and steady
macroeconomic fundamentals in Malaysia.
Bond issuance in the G3
currencies (US dollar, euro, and yen) in Asia generally stalled in 2011.
However, South-East Asian (Asean) local currency bond markets including
Malaysia's continued to bustle in 2011 with local currency bond issues,
providing alternative funding and investment options for Asian issuers
and investors. It wasn't just Asean companies that tapped the markets,
those in Hong Kong, India, and Korea also issued bonds in the region.
Data from the Asian Development Bank
indicate that local currency bond issuance by Asean companies during
the first nine months of 2011 rose 25% over the similar period in 2010.
In Malaysia, the growth was just above 26%. Further, local currency bond
issuances from Asean amounted to four times the issuance in US dollar,
euro, and yen from the region, compared with three times in 2010.
We
believe the positive trend for local currency bonds in Asia will
continue. Standard & Poor's expects most Asean nations will continue
to grow this year. Our 2012 forecast for Malaysia is 3.8%-4.3% real GDP
growth. This is a stark contrast to our expectation that the United
States will grow moderately and the European Economic and Monetary Union
(EMU or eurozone) will experience a mild recession in the first half of
2012. Given this scenario, Asean companies are likely to continue to
seek alternative funding sources as those in G3 markets (United States,
Japan, and the eurozone) become harder and more expensive to tap.
Policymakers in Asean have made significant regulatory changes and
related reforms to address long-standing concerns about liquidity and
diversity. Establishing legal frameworks and creditor rights, promoting
higher standards of disclosure, and streamlining issuance processes (as
in the July 2011 guidelines for corporate bonds in Malaysia) have
stimulated the development of bond markets.
Foreign issuers and
investors broaden and deepen the region's bond markets. They are
attracted to the liquidity and pricing in Asean's local currency bond
markets such as Malaysia and Singapore. In turn, foreign issuers help
build the yield curve and establish pricing benchmarks. As more global
and regional investors participate in the local currency bond markets,
funding costs for issuers will reduce. At the same time, the
availability and diversity of financing options will increase. Like
global issuers, investors will also demand greater transparency and will
be keen to see the region's credit culture strengthen further.
Within
Asean, Malaysia stands out. Policymakers in emerging markets view
Malaysia as a poster child for bond market development, given that it's
now the fourth-largest bond market in Asia, after Japan, China, and
South Korea. Malaysia's bond market has a strong infrastructure and a
record of solid growth due to a transparent and predictable regulatory
environment, the availability of independent credit research, the
existence of “risk-free” bonds of various tenors, and a bond pricing
service.
Domestic debt issuance in Malaysia is 10 times the
volume of cross-border issuance by local companies. This is also due to
the country's withholding taxes on cross-border issues by Malaysian
companies, which make offshore bond issuance less attractive. Issuer
concentration is relatively low, with the top 20 Malaysian issuers
accounting for less than 50% of outstanding debt. Dominant issuers
largely come from the infrastructure sector, which will continue to be a
major contributor to the growth of the bond market in the next few
years.Malaysia and Singapore lead Asean in providing issuers
particularly in infrastructure with access to long-term finance over 10
years. In other Asean countries, debt securities with short tenors
dominate. Besides making it difficult for infrastructure sector issuers
to get funding, pension and life insurance funds also find it tough
matching long-term investments to obligations.
Malaysia
has rapidly become the Islamic finance centre for Asia with smart
regulation and a growing ecosystem around Islamic finance. Approximately
70% of Malaysia's domestic debt issuance is in the form of sukuks
(financial certificates, similar to bonds, that are compliant with
Islamic law), making it the world's largest Islamic bond market with
over 60% of global sukuk issuance originating from Malaysia. The recent
RM30bil sukuk by Projek Lebuhraya Usahasama Bhd is the largest sukuk issue globally and has set the market abuzz.
Issuers
are likely to seek alternatives to conventional financing, given the
uncertain outlook for global credit markets. Islamic finance is one such
alternative. In Standard & Poor's
view, infrastructure projects are a logical fit for Islamic finance for
two reasons: (1) the Islamic finance market is growing and deepening;
and (2) Sharia (Islamic law) governs Islamic finance and is based on the
concepts of asset-backing and shared business risk.
Malaysia
pioneered the use of Sharia-compliant sukuk bonds to fund infrastructure
projects and is the leader in Islamic financing. The key issue for this
market, in our view, is that a lack of standardisation constrains sukuk
issuance. It also deprives the market of an organised structure to
facilitate secondary trading and liquidity.
Malaysia has other
challenges, too. Corporate governance standards are moderate and the
enforcement of governance practices could improve. Shareholder activism
is limited and corporate scandals far too frequent. While the law
provides for creditor protection, the process for enforcing claims can
be protracted. These should be easy to fix, provided they are approached
with vigour and zeal.
We are confident in Malaysia's ability to
continue to develop a robust credit culture where risk can be measured
and priced using objective standards. Standard & Poor's is assisting
in this area via independent and objective credit research. In 2009, we
launched our regional Asean rating scale, which provides more
granularity of credit risks than is possible with the Standard &
Poor's global scale.
In our view, the Malaysian capital market is
on the right path to creating debt platforms that will deliver the
depth and sophistication needed to fund the next stage of economic
development. But local policymakers cannot take their foot off the
pedal. A sustainable supply of credit and associated reforms will be
critical. Without them, growth could be constrained.
Surinder Kathpalia is the managing director of r's in Singapore.
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