Amid rising interest rates, higher inflation, volatile commodity prices and elevated geopolitical risks, the sukuk market remains resilient, notwithstanding the volatilities that are prevalent in the US dollar bond market. There are different dynamics that continue to support the sukuk market, driven by both issuers and investors.
Though rising interest rates inhibit issuers from accessing the market, there is a continuous funding demand from banks, for instance, to meet their capital requirements, driving the issuance activity from the financial institutions. There is also a steady deal flows from sovereigns, especially in the local currency market, as governments seek to fund their post-Covid economic recovery.
On the other hand, many corporates are still staying on the sidelines because of the market volatility and rising interest rates, as noted by Cagamas president and CEO Datuk Chung Chee Leong during the 5th Global Islamic Finance Issuers and Investors Leadership Dialogue held on October 27 in Kuala Lumpur and organized by The Asset Events.
But for Cagamas, Malaysia’s national mortgage corporation, which acts as an intermediary between the capital and housing markets, it has no choice but to issue bond/sukuk regardless of the prevailing interest rates and market environment. “While the issuance may be a bit expensive, the demand for Cagamas paper is still there,” he points out. “We have Malaysian investors who continue to invest in our paper.”
Cagamas generates an even stronger demand when printing sustainability or social sukuk, according to Chung, due to the limited supply of this type of instrument in the market. “We are hoping to see more issuances next year,” he adds.
On November 1, Cagamas announced the successful pricing of a 500 million ringgit (US$105.4 million) Asean social sustainable and responsible investment (SRI) sukuk for three years, 300 million ringgit Asean social bonds, also for three years, 2.3 billion ringgit combined multi-tenured Islamic medium-term notes, and a one-year S$65 million (US$45.6 million) fixed-rate term notes. The offerings bring the company’s year-to-date issuances from both domestic and international markets to 16.1 billion ringgit.
Bashar Al-Natoor, head of Islamic finance at Fitch Ratings, notes that while higher oil prices reduce the funding needs of oil-exporting countries, they are pursuing strategies to diversify their funding avenues, which is positive for the sukuk market. “We are seeing the likes of Saudi Arabia issuing monthly sukuk in local currency and Qatar introducing new Islamic treasury bills. The push to develop the domestic capital markets is another positive driver for the sukuk market,” he says. “There are also maturing sukuk that need to be refinanced, so that is supporting the market as well.”
For oil importers, which have a bigger funding gap, they need to come into the market for their funding requirements even in a difficult market environment.
Meanwhile, higher oil prices are translating into higher liquidity making its way into the banking system, so the appetite among Islamic investors remains intact.
Teik Leng Yeoh, head of debt markets at AmInvestment Bank, says the Malaysian sukuk market in general is still flush with liquidity. As of September this year, he notes that Malaysia is on track to maintain the same amount of new sukuk issuance as that of last year, which was about 105 billion ringgit.
“We may even have larger issuance this year as the liquidity is definitely there,” he notes. “As a market participant, we continue to print deals.”
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