KUALA LUMPUR: Malaysia's bond and sukuk market is poised for significant growth in the coming years, driven by key advancements in the nation's economy and banking sector.
The market has demonstrated resilience, buoyed by a positive outlook as global bond markets have rebounded following a slowdown in interest rate hikes by the Federal Reserve.
In July, foreign investors poured RM5.5 billion into Malaysian bonds, marking the largest monthly inflow in a year, according to data from Bank Negara Malaysia.
This influx has propelled total returns on ringgit-denominated bonds to 5.9 per cent year-to-date, making Malaysia one of the top performers among emerging markets.
While the market remains attractive, investors are advised to closely monitor global economic indicators that could further influence bond yields and sukuk issuance, according to industry insiders.
HSBC Malaysia head of global banking Christina Cheah said Malaysia's vibrant manufacturing sector, diversified economy, connectivity to global trade networks and supply chains, and strategic location within Asean present compelling investment opportunities.
She noted that important drivers such as strong dividend yields and favourable valuations are poised to draw in a greater flow of foreign funds.
"Domestic growth factors, including a strong pipeline of national infrastructure development mandates, Malaysia's prominence in the Islamic finance arena, and the rising demand for green, social, and sustainability project-related financing, are set to drive issuance growth.
"The development of industrial parks and economic zones in Malaysia will drive significant investments into sectors such as data centres and chip design manufacturing, amongst others.
"The ringgit bonds and sukuk capital market will be a key avenue to raise capital, complementing traditional banking channels," she told Business Times in a recent interview.
Furthermore, Cheah also believes that ringgit investors will become more receptive to impact and nature-based bonds as well as sukuk.
She said this trend, which is becoming increasingly significant across the globe, could facilitate financing for conservation and outcome-based initiatives by bringing together private capital with traditional funders.
HSBC had recently structured and acted as the sole lead manager on the World Bank's largest ever outcome bond issuance.
The US$225 million bond will help fund the World Bank's sustainable development activities globally.
Meanwhile, Cheah noted that as the Federal Reserve (Fed) adjusts its policy interest rates, global investors will reevaluate their portfolios, often shifting capital between emerging and developed markets based on factors such as relative yields and risk perceptions.
She said in this scenario, a higher interest rate environment in developed markets
will lead to increased demand for their assets, potentially causing capital outflows from emerging markets like Malaysia.
"Despite this, Malaysia's ringgit bond and sukuk market has demonstrated resilience throughout the post-Covid rate hike cycle, supported by the country's strong fundamentals, buoyant recovery plans, robust regulatory frameworks, and diversified investor base.
"The market's depth and liquidity provide a buffer against volatility stemming from external rate changes," she added.
Nonetheless, Cheah said Malaysia's ringgit bond and sukuk market has experienced significant growth over the years, underpinned by a stable environment and robust regulatory frameworks that have been established.
According to the Securities Commission Malaysia (SC), in 2023, the size of the capital market increased to RM3.8.
trillion from RM3.6 trillion in 2022, with the Islamic capital market accounting for more than 60 per cent of the overall domestic capital market.
Cheah noted that a vibrant capital market is crucial to facilitate continued economic development, offering both short- and long-term local currency financing in both conventional and Islamic formats.
"The market's ability to raise large amounts of capital at competitive rates is a key advantage, especially for highly rated issuers.
"The country's credit rating agencies, such MARC Ratings and RAM Ratings have played a major role in building a mature and credible ratings system.
"They have attracted a diverse group of institutional investors across insurance funds, global asset managers, pension funds, government-linked investment companies (GLICs), along with high-net-worth individuals," she said.
According to the Asian Development Bank (ADB), Malaysia ranks number one in Southeast Asia, with regards to the size of the corporate bonds and sukuk market specifically, as of the first quarter of 2024 (1Q24).
The country's solid bond and sukuk markets showcase a formidable ability to raise substantial capital with extended tenors, effectively financing large-scale and long-term projects.
This includes solar and hydro renewable energy projects, highway construction, gas turbines, gas-fired power plants, government infrastructure initiatives and MRT projects.