Lots and lots to cheer with sukuk success!

Government leaders were overjoyed, and they deserved to feel so, not so much because investors’ confidence was clearly reflected in the offering being oversubscribed but simply because they have worked hard to introduce with resounding success the world’s first US dollar sustainability sukuk issued by a sovereign, which means the proceeds will be used for eligible social and green projects aligned to the United Nation's Sustainable Development Goals (SDG) Agenda.

Moreover, both tranches of the sukuk have been assigned a rating of A3 by Moody's Investors Service and A- by S&P Global Ratings.

"We are extremely pleased and honoured by the investors' vote of confidence in our maiden sustainability sukuk issuance, which also reflects their belief in Malaysia's strong economic fundamentals and solid prospects for growth.

"The issuance is not only a global first on many fronts, but also a strong recognition of Malaysia's Islamic finance industry's innovative capabilities in structuring sukuk to help advance Malaysia's SDG-focused policies towards achieving our Shared Prosperity Vision 2030," said Finance Minister Tengku Datuk Seri Zafrul Aziz, adding further that this reinforced the country's position as the world's largest sukuk market.

Prime Minister Muhyiddin Yassin put it succinctly when he said “this clearly reflects investor and market confidence in Malaysia’s economic recovery and growth prospects even when the government faced a strong challenge from the Covid-19 pandemic across the last year,” which proves Malaysia’s economic management is on the right track towards strong and sustainable growth.

Muhyiddin said demand for the federal government’s Sukuk Kelestarian – the first dollar-denominated shariah-compliant government securities in the world – was so high that Putrajaya was able to raise US$1.3 billion (RM5.34 billion) or 30% above the initial target.

Yet another factor to cheer – the issuance is based on Malaysia's newly-established The Government of Malaysia SDG Sukuk Framework via using a special purpose vehicle, Malaysia Wakala Sukuk Bhd.

No one here was talking about foreign direct investments (FDIs) and both the PM and Finance Minister do not need an economist to tell them the nitty-gritty or the difference between FDI and debt instrument like sukuk because years of experiences in government service (PM) and in the banking industry (FM) have made them well-versed on debts and FDIs.

To begin with, unlike some economists, they know investor and market confidence in Malaysia’s economic recovery and growth prospects, and even the belief in Malaysia's strong economic fundamentals and solid prospects for growth have a positive impact on investors, particularly foreign investors.

There’s nothing misplaced in their enthusiasm over the oversubscription of the sustainability sukuk issuance, and yes, they are talking about loans or debts. And just to ensure some economists do not miss the point, they are not talking about household debt either but government debt.

Most economists, not all, would have you believe that incurring debt is bad or an unwise decision. But having debt doesn’t mean that a country is poorly run or financially unstable – in fact, some of the world’s biggest economic powers have a lot of it. But there is a fine line between a healthy and unhealthy amount.

Using the most recent data estimates from the International Monetary Fund's (IMF) World Economic Outlook (October 2020), you’ll be surprised to know that Japan tops the list of 18 countries with the highest debt-to-GDP ratio in the world at 177.08%, and to boot, the country is the world’s third-largest economy. With such a massive amount, it would look like it has had little “space”, nonetheless, to pay off or pay down its debt.

Brace for more surprises – France occupies the fifth position and is among the top three European countries in terms of its gross national debt, which is 110.01% of GDP or US$3.2tril; the US in seventh position (106.78% of GDP or a staggering US$27.29 trillion), Belgium (US$630bil, which is 103.81% of GDP), and the UK in tenth position (US$2.97tril which is 98.15% of GDP).

Meanwhile, Yemen, a country that is rife with conflict since early 2015 and rising national debt has gone hand in hand with increasing levels of corruption, mounting terrorist activity and the ongoing civil war, the country has debts of US$49.67bil which is 81.08% of GDP, making to the 12th position.

In 13th and 14th positions are Pakistan and Egypt respectively. While Pakistan is saddled with debts of 79.67% of GDP worth US$224.86bil; Egypt’s recorded debt is 77.96% of GDP or US$320.9bil.

So basically, we see this pattern of a higher debt to GDP ratio (i.e., more than 100%) is common for a developed country whereas country with a relatively lower debt to GDP ratio (but still very high for some economists) will likely characterise a developing country.

Why is this so?

Because in some instances, the higher debts or loans can be used to finance productive economic activities and via a multiplier effect on the economy, the GDP of the country will increase, which in turn will enable the country concerned to reduce its debt burdens in the future.

However, in 2010, the World Bank published a study which revealed that a 77% debt-to-GDP ratio was the tipping point for developed economies, and a 64% ratio for emerging markets. Countries which stayed above this threshold for long periods saw significant slowdowns in economic growth.

The tipping point figures above need to be revised temporarily in the wake of the Covid-19 pandemic where governments the world over have to dish out huge economic stimulus to help their citizens whose livelihoods are affected. If these are not revised, there won’t be any fiscal space left for fiscal policy to flex its muscles to assist in doling out the stimulus.

In Malaysia’s case, its debt now stands at 58% of GDP, just 2% shy of the 60% debt ceiling. The ceiling was raised with parliamentary approval, no less, from 55% last year as a temporary measure to counter the pandemic’s economic impact.

It shows a good management of the fiscal space by the government which has to balance the need to dish out stimulus between sparingly and frequently. And that’s not an easy task to achieve.

Since the fiscal space is narrowing, the government has resorted to borrowing such as through the issuance of the sukuk, and also using reserves such as the Kwan fund. All these are normal methods of getting funds readily available in times of crisis which were used by almost all countries.

There is one last reason to cheer, and this relates to the plan to go big on climate change and the greening of the economy in order to achieve sustainable development which will be delineated in both the Twelfth Malaysia Plan (2021-2025), and the Thirteenth Malaysia Plan (2026-2030) and not least national policy frameworks such as the Green Technology Master Plan Malaysia (2017-2030).

The aim of sustainable development is to balance our economic, environmental and social needs, allowing prosperity for now and future generations. Sustainable development consists of a long-term, integrated approach to developing and achieving a healthy community by jointly addressing economic, environmental, and social issues, whilst avoiding the over consumption of key natural resources.

It encourages us to conserve and enhance our resource base, by gradually changing the ways in which we develop and use technologies. Countries must be allowed to meet their basic needs of employment, food, energy, water and sanitation.

Hence, climate and green financing will play an increasingly important role in global investment in the coming years, and Malaysia is expected to play a pivotal part in this journey.

Such a seismic shift will not only provide a valuable opportunity for banking and capital markets to steer positive change but also create new revenue opportunities.

And the issuance of the sustainability sukuk is the maiden attempt to move towards this shift and it has resulted in a resounding success. Hence, enthusiasm is called for, and so is the more reason to cheer!

---

Jamari Mohtar is Director of Media & Communications at EMIR Research, an independent think-tank focused on strategic policy recommendations based upon rigorous research.