KUALA LUMPUR (Feb 14): The Malaysian debt capital market (DCM) is well developed compared to its emerging-market peers and other core Islamic finance markets, with 2024 issuance set to rise due to issuers’ funding diversification and refinancing needs, according to Fitch Ratings.

In a statement on Tuesday, the rating agency said sukuk and Malaysian ringgit debt will continue to dominate issuance.

All Fitch-rated Malaysian sukuk are investment-grade and on a stable outlook.

Fitch global head of Islamic finance Bashar Al Natoor said sukuk held the majority share (around 60%) of outstanding DCM in 2023, and this trajectory will continue.

“The Malaysian regulator grants tax deductions to sukuk issuers and investors, which steers growth.

“However, ringgit currency volatility is a key entry limitation for international investors in the Malaysian DCM, while for sukuk, demand from Gulf Cooperation Council (GCC) Islamic banks can be additionally impeded due to differences in shariah interpretation,” said Al Natoor.

Fitch said the Malaysian DCM grew by 5.8% in 2023 to US$542.5 billion (RM2.60 trillion) outstanding (according to Bloomberg), 92% of which is in ringgit.

It said about US$60 billion of debt will mature in 2024.

The agency said the government’s 2024 budget, which is still slightly expansionary, will drive DCM growth, with the authorities planning several development initiatives guided by the Madani Economy framework.

Fitch said the government is fairly dependent on oil-related revenue, adding that the agency expects oil prices to fall to US$80/bbl in 2024 and US$70/bbl in 2025.

Al Natoor said Malaysia has high public debt compared to peers, saying "we estimate general government debt at 72.3% of gross domestic product in 2023".

“We expect Bank Negara Malaysia’s 2024 policy rate to be unchanged at 3%,” he said.  

Fitch said about US$3.1 billion of ESG-related debt was issued in 2023, down by 46% from 2022, adding that of this, 95% was in sukuk format, up from 50.3% in 2020.

The agency said despite the ringgit depreciating by over 5% against the US dollar in 2023, hitting a record low, foreign holdings in the outstanding DCM grew to 14% in the cumulative first nine months of 2023 (2022: 13.1%).

Malaysia is the largest sukuk market globally, and the third-largest DCM in the Asean region, with a 20% regional share outstanding at end-2023, close behind Indonesia (24%) and Singapore (22%).