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MALAYSIA: As Malaysia
prepares to enter the final leg in its journey towards achieving a
high-income status against the backdrop of a weakening economy, more are
turning to the nation’s city-building plans, which have ushered in new
attractive opportunities for the Islamic debt capital markets, as a means
to buttress the economy.
Infrastructure forms a huge component in the country’s 11th
Malaysia Plan (2016-20), an instalment of a series of five-year plans the
nation has put in place since 1966 to develop itself. The government aims
to boost GDP to 5-6% per year over the 2016-20 period – a relatively
realistic figure for the tiger cub economy which clocked in a 6% expansion
in 2014 – however, recent global volatility amid domestic political
tensions has significantly affected business confidence leaving the
Southeast Asian nation in a precarious position as foreign investors pull
back from the market. The large political demonstrations over the weekend,
in Moody’s Investors Service’s opinion, could further undermine market
sentiment and capital inflows and as a result, the rating agency expects
GDP growth to moderate to 4.8%.
While the outlook for the Malaysian economy, whose currency has plunged to
record lows becoming the worst-performing currency in Asia, may look bleak,
however, some quarters are maintaining a more optimistic stance believing
that investors have been overly negative. The country’s healthy current
account surplus aside, market participants also believe the country’s
robust infrastructure project pipeline will bolster Malaysia’s economy.
And these infrastructure projects which include public transportation and
basic amenities enhancement have opened up avenues for Islamic finance. One
particular segment worthy of mention is the tolled-expressway sector;
Malaysia in its 2015 budget allocated at least RM75 billion (US$17.93
billion) to develop the country’s highways and railways and it is likely
that industry players would turn to the debt capital market to meet its
funding needs.
According to RAM Ratings, bonds and Sukuk issued by the tolled-expressway
sector added up to RM54 billion (US$12.91 billion), of which RM49 billion
(US$11.71 billion) remained outstanding and this sector accounted for
approximately 15% of all outstanding corporate debt issues in the domestic
market as at mid-August 2015.
“The funding landscape for project financing particularly those with
lengthy concession tenures and stretched payback period will continue to
evolve as the tighter Basel III regulations work their way into our
domestic financial institutions,” said Davinder Kaur Gill, RAM’s co-head of
infrastructure and utilities ratings. Gill added that, with over 10
concessions having been recently awarded or to be awarded, vast
opportunities for innovative infrastructure financing structures from the
debt capital market arise.
Significant to the Islamic markets is the fact that a majority (70%) of all
sector-related issues comprised Sukuk as at mid-August 2015. “We expect
Sukuk to remain dominant as Malaysia accounts for US$173.8 billion of [the]
world’s Sukuk which is 56% of total outstanding Sukuk as at end-June 2015,”
highlighted Gill.
The West Coast Expressway, a 233 km expressway connecting Taiping, Perak to
Banting, Selangor is a good illustration of this opportunity. “The West
Coast Expressway project is an example of how long-term Sukuk funding can
be tailored to provide financing solutions for construction of
infrastructure facilities toward achieving the 11th Malaysia
Plan,” agreed Mohamed Nazri Omar, CEO of national financial guarantee
insurer Danajamin, who is co-guaranteeing West Coast Expressway’s RM1
billion (US$239 million) Sukuk of up to 21 years. “The construction works
will contribute to economic growth via multiplier effect while upon its
completion, it will further stimulate economic growth through improved
accessibility in the western corridor of Peninsular Malaysia.”
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