Strong demand for Malaysia's international sukuk shows investor interest in sustainability finance - Moody's

"The increased issuance, which was originally slated for just US$1 billion combined, in part reflects investor interest in sustainability linked, Shariah-compliant products.

"This issuance will pave the way for other Malaysian issuers to tap into this funding base to address environmental, social and governance (ESG) concerns," the rating agency said in a note today.

The government had, on April 22, issued two tranches of its first sovereign international sustainability sukuk, comprising US$800 million with 10-year trust certificates and US$500 million with 30-year trust certificates.

Moody's said the issuance was credit positive for the government as the addition of a new avenue of financing further anchors its already low liquidity risk through diversifying the country's creditor base and keeps funding costs low.

"The issuance also reinforces Malaysia's leading position in Islamic finance," it said.

Since issuing the world's first sukuk in 1990, the country has become the largest sukuk market in the world, accounting for 32 per cent of total global sukuk issuance in 2020.

Malaysia is also one of the few sovereigns globally for which sukuks are an important instrument through which deficit financing needs are met, it said.

Moody's assessed Malaysia's exposure to environmental risk to be moderate, reflecting the government's exposure to petroleum-related income, which accounts for around a fifth of total revenue.

It said the focus on social projects support its view that the country's exposure to social risk is neutral to low, reflecting favourable demographics, the access to quality education, housing, healthcare and basic services, as well as policies that address the needs of the bottom 40 disposable income group category, which mitigate income inequality.

"These strengths help offset social issues that could arise from systematic policies that are designed to promote the economic interests of the ethnic Malay (Bumiputera) majority, including the use of quotas in university admissions, public service recruitment, housing and other areas," it added.

Moody's opined that the strong interest for the international sustainability sukuk, which resulted in relatively low yields of 2.070 per cent for the 10-year trust certificates and 3.075 per cent 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 the rating agency's 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 6.0 per cent of gross domestic product in 2021, narrowing to about 5.0 per cent in 2022-23, but still wider than the deficits of around 3.0 per cent and 4.0 per cent before the pandemic," it added.

Moody's added that besides expanding its financing options, the government's issuance also sets a benchmark for other Malaysian issuers seeking to tap international investors for ESG products.