KUALA LUMPUR: Malaysia's debt capital market (DCM) has expanded 4.4 per cent year-on-year to cross US$550 billion outstanding at the end of first half 2024 (1H24), according to Fitch Ratings.
The DCM issuance will likely stay at similar levels in 2H24 or fall due to the government's gradual fiscal consolidation, with the federal deficit expected to fall in the near term, the firm added.
"Impetus could come from financial institutions and corporate issuances as they seek to refinance and diversify funding. The DCM faces risks from ringgit, rates, commodity price volatilities, and global geopolitical events," Fitch said.
Fitch global head of Islamic finance Bashar AL Natoor said the Malaysian DCM is deep and well developed compared to other Organisation of Islamic Cooperation (OIC) countries, although it remains ringgit-focused.
"Sukuk is likely to stay dominant in the DCM due to supportive ecosystem. Unlike most OIC countries, investors in Malaysia's DCM are more diversified and include banks, provident and pension funds, Hajj funds, insurance and takaful operators, and fund managers," he added.
Fitch rates US$16 billion of Malaysian sukuk, all investment grade, with issuers on stable outlook.
DCM issuance in 1H24 fell 8.3 per cent YoY to US$45.2 billion due to fiscal consolidation, with the government deficit in 1H24 lower than 1H23.
Around 60 per cent of 1H24 issuance was from the government and the rest from financial institutions, corporates, project finance, and others.
Bank Negara Malaysia is providing regulatory flexibility for multilateral development banks to issue ringgit sukuk and provide ringgit financing to resident entities without prior approval.
Fitch said a stronger ringgit could attract more non-resident holding of domestic government bonds (three months of 2024 share: 21.3 per cent).
"We expect the factors driving ringgit depreciation, including negative interest-rate differentials and portfolio investor sentiment, to wind down in 2H24. Government efforts to support the ringgit included encouraging government-linked companies to consistently repatriate foreign investment income and convert it to ringgit," it added.
In May, the central bank kept the Overnight Policy Rate at 3.0 per cent with the same likely through 2H24 and 2025.