Indonesia Sukuk Beats Malaysia in Attracting Brexit-Haven Funds

  • Rupiah Islamic bond yields fall faster than those in Malaysia
  • ‘Indonesia offers greater returns as investors chase yield’

Indonesia’s Islamic bond yields have fallen faster than Malaysia’s in the past three months, as the nation’s higher-yielding notes do better at attracting investors fleeing plunging rates in the developed world.

Yields on rupiah sukuk due 2019 slid 39 basis points in the period, compared with 26 basis points for equivalent paper in Malaysia. Indonesia’s three-year Islamic bonds pay 7.21 percent, while those in Malaysia yield 3.25 percent. Overseas investors pumped $6.6 billion into Indonesian debt as of July 12 and $4.9 billion into Malaysian securities in the first six months, data compiled by Bloomberg show.

“On an absolute basis, Indonesia still offers greater returns as investors chase yield,” said Fakrizzaki Ghazali, a Kuala Lumpur-based credit strategist at RHB Research Institute Sdn. “I see limited downside potential for Malaysian sukuk yields.”

Flows into emerging-market debt funds set a new weekly record for the period ended July 6, according to EPFR Global data, on concern developed economies will take a hit after Britain voted to exit the European Union, forcing the U.S. Federal Reserve to delay interest rate increases. Indonesian bonds are the best performers in Southeast Asia this year after the government passed a tax amnesty bill on undeclared income held overseas, while a rate cut by Malaysia’s central bank on Wednesday helped drive gains in that nation.

RHB’s Fakrizzaki said that, with such low yields, Malaysia is vulnerable to any potential Fed tightening, strength in the dollar and the impact of lower commodity prices on the government’s finances. The nation is Asia’s only major net oil exporter. Bank Negara Malaysia lowered borrowing costs for the first time in seven years on Wednesday in its sole policy shift since July 2014.

Cooling Inflation

Cooling inflation had already given Indonesia scope to ease policy this year as price increases averaged 3.90 percent during the first half, compared with 2015’s 6.38 percent. After Malaysia’s surprise rate cut, which was only predicted by Goldman Sachs Group Inc. in a Bloomberg survey, the central bank lowered its projection for consumer prices to 2 percent to 3 percent in 2016, from 2.5 percent to 3.5 percent.

Bank Negara cited increasing signs of moderation in major economies and downside risks from the U.K.’s vote to leave the EU as it reduced the overnight policy rate to 3 percent. It also cut the base for its benchmark to 2.75 percent, suggesting more room for easing.

“The easier monetary policy by the Indonesian central bank since the beginning of the year, put in place on the back of a stable inflation rate of between 3 percent to 5 percent, has clearly helped the rupiah sukuk market,” said Johar Amat, head of Treasury at OCBC Al-Amin Bank Bhd. in Kuala Lumpur. “Going forward, the ringgit sukuk market should be supported as Bank Negara Malaysia has started to ease its monetary policy.”

Currency Rebound

Both the nation’s currencies are seeing a revival too, with an 8.4 percent gain in the ringgit this year outpacing the rupiah’s 5.3 percent advance. The country’s exchange rates posted respective losses of 19 percent and 10 percent in 2015.

While Indonesia and Malaysia have both provided stimulus through infrastructure spending programs, the latter has been dogged by a political scandal involving Prime Minister Najib Razak and a bond default at a state investment company, 1Malaysia Development Bhd.

Indonesia’s government is speeding up investment in roads and railways amid pressure from President Joko Widodo. Even with a reduced allocation this year, Indonesia’s Public Works Ministry has spent a bigger proportion of its budget in the first half compared with 2015.

“Indonesia’s fundamentals are getting better,” said David Sumual, chief economist at PT Bank Central Asia in Jakarta. “We also see the rupiah as quite stable compared with last year, and that’s why we see more inflows to rupiah assets.”

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