Malaysia's stimulus plans hampered as Islamic yield curve steepens

Prime Minister Najib Razak’s plan to revive Malaysia’s faltering economy is getting no help from the country’s Islamic bond market.
Yields on government 10-year sukuk, used by companies to gauge the cost of Shariah-compliant financing, are at their highest level in 18 months relative to two-year securities, according to data compiled by Bloomberg. And with the slide in Brent crude prices sapping Malaysia’s oil-export revenue against a backdrop of looming U.S. interest-rate increases, investors say longer-term borrowing won’t be getting cheaper anytime soon.
“With the U.S. expected to raise interest rates soon, Malaysia’s yield curve will remain steep next year,” said Elsie Tham, a senior fund manager at Kuala Lumpur-based Manulife Asset Management Services Bhd who oversees more than US$1 billion. “Companies will find it challenging to raise funds because of slower economic growth.”
That’s bad news for Najib’s government as it looks to simultaneously reduce the budget deficit and finance a US$444 billion public and private-sector spending program, at a time when the economy is growing at its slowest pace in two years. Islamic bond sales in Malaysia, the world’s biggest sukuk market, dropped 56 % in the third quarter from the previous three months, according to data compiled by Bloomberg.
Investors are shunning 10-year sovereign sukuk, as a sliding ringgit hurts sentiment and fuels capital outflows. The concern was reflected in a conventional sale of 2025 bonds last week that drew the fewest bids since December.