EPF will be forced to buy more sukuk, says lender

Published: 2010/01/05

THE Employees Provident Fund (EPF) will be forced to buy more Islamic bonds this year as the government cuts conventional note sales to the state-run pension manager, according to Royal Bank of Scotland Group plc (RBS).

Malaysia plans to lower total sovereign sales to RM40.5 billion this year from RM52 billion while maintaining the same number of Islamic bond sales as last year, it said two weeks ago.

It will also reduce conventional bond auctions and cut private placements to the EPF to two from eight in a bid to shrink state debt.

"The sharp reduction in private placements to the EPF in 2010 will clearly put the competition pressure back on the demand side," Chia Woon Khien, emerging markets analyst at the Edinburgh, Scotland-based RBS, said in a note to clients e-mailed yesterday.



Malaysia is the world's biggest market for Islamic bonds, known as sukuk, and may enable individuals to trade syariah-compliant debt on its bourse as part of a plan to attract new investors.

Global sukuk sales rallied to US$20.2 billion (RM69 billion) last year from US$14.1 billion (RM48 billion) in 2008 after jumping to a record US$31 billion (RM106 billion) in 2007 amid a surge in Arab oil wealth, according to data compiled by Bloomberg.

Sukuk are asset-based securities that pay a profit rate instead of interest, which is prohibited by syariah law.

Malaysia is planning six sukuk sales this year, the same as last year, starting this month with 3.5-year bonds and ending in November with a 10-year issue, according to a calendar published on Bank Negara Malaysia's website. The calendar does not provide details on the amount to be raised at each sale.

As lower sales boost the cost of buying conventional Malaysian bonds, the EPF may broaden its mandate to include dollar-denominated sukuk, the Singapore-based Chia said in her note.

The EPF had RM361.1 billion under management as at September 30 2009, with RM97.35 billion, or 27 per cent, invested in Malaysian Government Securities, according to its website. - Bloomberg