The central bank’s recent proposal to issue a second sovereign global Islamic bond is most likely aimed at setting a new pricing benchmark and facilitating a price discovery mechanism for ringgit bond issues, economists said.
“Under the current global financial turmoil, if we (Malaysia) can raise funds in the global market, it signifies that our sovereign credit rating is intact,” RAM Holdings Bhd chief economist Dr Yeah Kim Leng told The Edge Financial Daily.
“Perhaps the rationale is to provide a risk-free pricing benchmark for Malaysian ringgit bond issues. When promoting a ringgit bond issue, we need a benchmark that is liquid and risk-free,” he added.
“It’s a way of enhancing the price discovery mechanism for Malaysian ringgit bond issues; it (price discovery) is an important component to enable the market to function efficiently,” Yeah added.
Price discovery, according to the OECD Glossary of Statistical Terms, is a process of establishing a market price at which demand and supply for an item are matched by bringing buyers and sellers together and making the process transparent.
Bank Negara Malaysia (BNM) governor Tan Sri Dr Zeti Akhtar Aziz said recently that Malaysia should sell a second sovereign global Islamic bond. “We have mentioned to the government that it would be good to raise funding again and have our name in the market,” Reuters quoted Zeti as saying.
It has been nearly six years since the Malaysian government issued its first sovereign global sukuk in 2002, spurring other governments such as those of the United Arab Emirates, Bahrain and Pakistan to follow suit.
Bahrain listed its second government sukuk, a US$350 million (RM1.23 billion) issuance, on the London Stock Exchange in March this year, with more than 50% of the papers bought by European investors and the rest by banks based in the Middle East, according to the Financial Times.
A second global sovereign sukuk would in the short term be used mainly for financing the Malaysian government’s budget deficit, said ECM Libra Investment Bank Bhd economist Dr Lai Mun Chow.
“Over the past six years, the government budget deficit had been in a downward trend. As a percentage of GDP, it came off steadily from 5.6% in 2002 to 3.2% in 2007. It is only in 2008 that it is estimated to surge to 4.8%,” he said, to a question on the timing of the proposed issuance.
“The government can kill two birds with one stone by issuing a sovereign Islamic bond. Not only can it raise funds to finance the government budget deficit, this will also broaden the investor base, as well as set and develop global yield benchmarking,” Lai added.
He concurred with RAM’s Yeah on the price discovery mechanism factor as a reason behind a second sovereign Islamic bond. According to Lai, this would facilitate the price discovery process, which he deemed the ‘long-term over-riding objective’ of a second issue.
When asked what the implications would be if the government did not proceed to issue the second sovereign Islamic bond, Yeah said it would create some difficulty for the market particularly the private sector which needed liquid benchmarks that were tradeable and enabled price discovery.
ECM Libra’s Lai said the government could finance the deficit through other conventional public debt securities even if this second issue did not materialise. “The government may even turn to other non-inflationary domestic sources of funding, as there is ample liquidity in the local financial system,” he added. |
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