KUALA LUMPUR: Bank Negara Malaysia's (BNM) move to allow certain foreign financial institutions issue ringgit bonds and finance local entities will help boost investor confidence in the local debt market, Fitch Ratings said in a note on Friday.
The central bank announced a liberalisation of foreign exchange policy (FEP), specifically for multilateral development banks (MDBs) like the World Bank and eligible non-resident development financial institutions (DFIs).
Fitch Ratings managing director & global head of Islamic Finance Bashar Al Natoor said that the entry MDBs and DFIs, which typically have high credit ratings, is expected to enhance the local debt capital market's overall credit profile.
"This could provide greater confidence to investors. This policy not only fosters a more robust and dynamic financial market in Malaysia but could also set the stage for long-term economic development," he added.
Al-Natoor said there are several key insights that have emerged from the policy change.
"Firstly, the participation of MDBs and DFIs will likely increase market liquidity, making it easier for other issuers to raise funds."
"Secondly, the move could attract a more diversified group of investors, including those with a preference for high-quality, investment-grade securities."
"Thirdly, MDBs and DFIs can provide substantial financing for infrastructure and development projects, driving economic growth," he said.
Al Natoor said the streamlined application process for DFIs and the flexibility for MDBs highlights Malaysia's commitment to creating an investor-friendly environment.
He added that by allowing MDBs and qualified non-resident DFIs to participate in the local bond and sukuk market, Malaysia positions itself as a more attractive destination for international investors, including Islamic investors."This can potentially increase Malaysia's share in the global and regional financial markets.
Meanwhile, he explained that the integration of MDBs and DFIs into the Malaysian sukuk and bond market not only enhances market credibility but also aligns Malaysia with global financial standards, making it a more competitive player in the region and Organisation of Islamic Cooperation (OIC) countries.
"Given Malaysia's leadership in Islamic finance, we anticipate a substantial portion of these issuances to be sukuk, which could solidify Malaysia's ambition to become as a truly active global hub for Islamic finance," he added.
Al Natoor cautioned about potential challenges policy change highlighting potential weaknesses and threats that need to be managed.
"Market volatility could increase with the entry of foreign entities, and local issuers might face heightened competition. Regulatory challenges might need to be addressed to ensure compliance and smooth operation."
"We will be closely monitoring this development and its actual impact on market dynamics, as it promises to enhance market liquidity, diversify the investor base, and support local development projects in Malaysia. The initiative aligns with global financial standards and positions Malaysia for sustainable economic growth," Al Natoor concluded.