KUALA LUMPUR (Nov 15): Bank Negara Malaysia (BNM)’s move to allow multilateral development banks (MDBs) and selected non-resident development financial institutions (DFIs) to issue ringgit debt securities and finance local entities is expected to increase market liquidity, making it easier for other issuers to raise funds, according to Fitch Ratings.
The move could also attract a more diversified group of investors, including those with a preference for high-quality, investment-grade securities, said Fitch managing director and global head of Islamic finance Bashar Al Natoor.
In addition, MDBs and DFIs can provide substantial financing for infrastructure and development projects, driving economic growth, said Al Natoor.
“This initiative is a pivotal step in enhancing the Malaysian financial market’s depth and attracting a more diversified investor base, which is crucial for sustainable economic growth,” he said in a statement on Friday.
BNM earlier on Friday announced its move to liberalise foreign exchange rules to make it easier for international financial institutions to issue ringgit-denominated bonds and sukuk in the country. Under the change, MDBs and non-resident DFIs are free to issue ringgit-denominated debt securities in Malaysia, and provide financing to domestic corporates, according to the central bank.
Attracting global investors
Al Natoor noted that by allowing MDBs and DFIs to participate in the local bond and sukuk market, Malaysia is positioning 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. The presence of established MDBs and DFIs could also support investor confidence in the Malaysian Debt Capital Market (DCM),” he said.
Al Natoor said the entry of MDBs and DFIs, which typically have high credit ratings, is expected to enhance the market's overall credit profile.
“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 said.
In addition, 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.
Malaysia’s DCM is deep and well-developed among OIC countries, with over US$550 billion (RM2.46 trillion) in outstanding issuance as of the first half of 2024, he said, noting that the local DCM is more diverse, comprising banks, provident and pension funds, haj funds, insurance, takaful operators and fund managers.
Challenges and potential risks
Al Natoor, however, cautioned that the increased foreign participation could lead to heightened market volatility, while local issuers may face heightened competition.
Regulatory challenges might need to be addressed to ensure compliance and smooth operation of integration of MDBs and DFIs into the local bond market, he said.
Commenting on the local DCM outlook, Al Natoor said the market faces risk from ringgit, rates, commodity price volatilities and global geopolitical events.
DCM issuance in the first half of this year (1H2024) fell by 8.3% year-on-year to US$45.2 billion due to fiscal consolidation, with the government deficit in 1H2024 lower than 1H2023, he explained.
“The 2H2024 DCM issuance in Malaysia is likely to stay at similar levels to 1H2024 or fall due to the government’s gradual fiscal consolidation, with the federal deficit expected to fall in the near term. Impetus could come from financial institutions and corporate issuances as they seek to refinance and diversify funding,” said Al Natoor.