Fixed Income
Malaysia’s thriving fixed-income (FI) market is equivalent to almost the size of the nation’s Gross Domestic Product (GDP), placing it third in Asia after Japan and South Korea in terms of the FI market size. In other words, Malaysia boasts the largest bond market in South-east Asia. As at end December 2023, the domestic bond market was valued at RM2.0 trillion (2022: RM1.87 trillion) on the back of continued bond and sukuk fundraising, particularly from the public sector. This translates into about 52.6% of the nation’s RM3.8 trillion overall capital market. The domestic bond market also witnessed the return of foreign investors, with net inflows amounting to RM25.78 billion in 2023 compared to net outflows of RM9.78 billion in 2022.
Malaysian bonds are stable, liquid and offer attractive real yields to investors. The International Capital Market Association (ICMA) reported that Malaysia was the only country in Southeast Asia that showed growth in 2023 by recording a year-on-year growth rate of 52%, mainly driven by issuances from the financial industry.
The history of Malaysia’s bond market can be traced back to the late 1980s and early to mid-1990s, when the domestic economic boom was fuelled by the privatisation of mega infrastructure projects. Conventional bonds and sukuk had become a popular way to raise funds for such projects, offering long-term local-currency financing. Against this backdrop, Bank Negara Malaysia (BNM) established the country’s first credit rating agency (or CRA) – Rating Agency Malaysia Berhad (now RAM Rating Services Berhad or RAM Ratings) – in November 1990, as a catalyst for the development of the domestic debt capital market (DCM). The second CRA, Malaysian Rating Corporation Berhad (better known as MARC), followed in 1996.
The domestic bond market’s stakeholders include bond and sukuk issuers, financial institution intermediaries, investors (mostly institutional, e.g. pension funds, insurance funds and fund management companies) and, of course, BNM and the SC, as the regulators. Other participants in the Malaysian bond market include Danajamin Nasional Berhad, Bond Pricing Agency Malaysia (BPAM) and Fully Automated System for Issuing/Tendering (FAST).
Raising Funds and Investing in the Bond Market
By and large, the Malaysian bond market is segregated into the public (government bonds) and private (corporate bonds) segments. Government debt papers encompass Malaysian Government Securities (MGS), Malaysian Government Investment Issues (MGII), Malaysian Treasury Bills (MTB), and Malaysian Islamic Treasury Bills (MITB). On the other hand, corporate bonds (or private debt securities) originate from the private sector. Corporates tap the bond market for financing through the issuance of long-term bonds, medium-term notes (MTN) and short-term commercial papers (CP). Retail bonds and sukuk may be issued and traded on either Bursa Malaysia or over-the-counter through appointed banks. Although the new issuances of Malaysian corporate bonds in 2023 declined by 22.82% to RM118.3 billion (2022: RM153.3 billion), fundraising via corporate bonds continued to overshadow the RM9.4 billion raised through the equity market (2022: RM26.0 billion).
The Malaysian fixed-income market is also further segregated into the conventional (bonds) and sukuk segments. The fundamental difference between two instruments is that sukuk comprise fixed-income instruments that comply with Shariah principles. In 2023, corporate sukuk commanded almost 78% (2022: 82%) of total corporate bond and sukuk issuances. Total sukuk issuances in 2023 represented 60.84% (2022: 68.2%) of total bonds and sukuk issuances whereas total sukuk outstanding represented 63.2% (2022: 63.3%) of total bonds and sukuk outstanding. On the sustainability front, both local and global investors have been responding to the call for more sustainable, socially and environmentally responsible methods of financing. This has in turn given rise to a flourishing market for sustainable and responsible investment (SRI), which has been rapidly gaining traction globally. In 2023, a total of 15 corporates issued a total of RM8.68 billion SRI sukuks in Malaysia, or a 9.5% of the total corporate sukuk issuance for the year. This brought the number of SRI sukuk issues to 34 since 2015. At the same time, outstanding corporate SRI sukuk grew to RM26.32 billion as at year-end (end-December 2022: RM17.9 billion), making up 3.75% of the total outstanding corporate sukuk.
Regulatory System
The Malaysian bond market is under the purview of BNM and the SC. All bond and sukuk issuances require the SC’s approval. To enhance efficiency and turnaround time, the SC introduced the Lodge and Launch Framework (LOLA) in 2015. LOLA shortens time-to-market by enabling the launch of structured products, bonds, sukuk and asset-backed securities once the required information has been lodged with the SC via its online submission system. This contrasts against the previous 14 to 21 days for approval. In 2017, the SC launched the Bond and Sukuk Information Exchange (BIX), a non-profit information platform that provides free access to information on bonds and sukuk issued in Malaysia – in both the primary and secondary markets.
In the corporate bonds and sukuk market, market participants play a very important role in maintaining market integrity, by ensuring compliance with regulations and protecting investors’ interest. Malaysia’s SC continues to engage market participants such as credit rating agencies, bond pricing agency and bond and sukuk trustees to exchange knowledge, offer insights, and discuss solutions to current and future challenges.
Investor Profile
Bonds and sukuk are perceived as an asset class that can serve as a hedge when markets are bearish, besides being positioned as an asset class that can offer steady income in the long run. Historically, bonds and sukuk could only be purchased by institutional investors (e.g. pension funds, insurance funds) or high-net-worth individuals due to high-barriers to entry. One lot of bonds and sukuk is priced at RM5 million, with the lowest denomination of RM250,000 per odd lot for high-net-worth individual investors. In 2018, the SC launched its seasoned bond framework, thereby enabling retail investors to purchase bonds and sukuk that had originally been meant for only institutional investors in the primary market. In addition to seasoned bonds, exchange-traded bonds and sukuk (ETBS) have also made it easy for investors to purchase fixed-income securities listed on Bursa Malaysia. ETBS, issued by companies and governments to finance their needs, take various forms such as fixed-rate, floating-rate and hybrid bonds and sukuk.
Rating and Pricing
Corporate bonds are perceived to be of a higher risk profile compared to government bonds. As such, interest or coupon rates are usually higher for corporate bonds, even for companies with top-notch credit quality. Bonds are typically backed by the ability of the issuer to pay, underscored by its earnings from future operations. Credit risk is calculated based on the issuer or borrower’s overall ability to repay a bond or loan according to the original terms. Before bonds are issued to investors, they are reviewed in terms of the issuer’s creditworthiness, which is where the CRAs play their part. In Malaysia, both RAM Ratings and MARC have their own rating scales and methodologies when assigning credit ratings to bonds and sukuk. In essence, the higher an issuer’s credit risk, the lower the assigned credit rating. Lower-rated bonds normally pay higher interest rates/coupons (i.e. higher yield) as investors will demand a premium for the higher risk they take on. A bond’s price and yield determine its value in the secondary market.
Secondary Market
Bonds and sukuk can be bought and sold in the secondary bond market after they have been issued in the primary market. Retail bonds and sukuk may be issued and traded either on Bursa Malaysia or over-the-counter (OTC) through appointed banks. In the secondary market, bond and sukuk sale proceeds go to the seller (either an investor or a dealer) while in the primary market, they are channelled directly to the issuer. The size of the Malaysian bond market has been matched by the development of its secondary market. Trading across various maturities compares well with that of other bond markets in the region. Most secondary market activity in Malaysia is concentrated on MGS, the turnover ratio of which is significantly higher than that of MGII.
Incentives and Market Development
To encourage the development of the domestic sukuk market, the Government of Malaysia offers several tax incentives such as exemption of stamp duty and real property gains tax as well as exemption on interest earned from such instruments. In a bid to further liberalise the financial sector and broaden the corporate bond market, the SC removed mandatory credit rating in January 2017. That said, many entities still obtain credit ratings from the CRAs to underscore the integrity and credibility of their bonds and sukuk.