Malaysia’s budget hole is so deep that even a narrowing deficit won’t shrink its Islamic debt pile. The government will keep printing sukuk at record levels through 2024, Moody’s Investors Service said on 13 March. That means roughly half of all federal borrowing will come from Islamic securities. The other half? Conventional bonds. But sukuk carry the load.
Moody’s projects Kuala Lumpur will sell US$20-22 billion of sovereign sukuk in both 2023 and 2024. That’s RM90-99 billion a year. The fiscal deficit is expected to fall to 5 percent of GDP from 6 percent last year. Not enough. The financing gap stays large. “Despite consolidation efforts, Malaysia’s borrowing requirement remains sizable,” said Matthew Moore, vice-president at Moody’s sovereign group.
About 45 percent of the 2023 programme will go to refinancing notes maturing over the next two years. That is a direct hangover from pandemic-era stimulus. The government borrowed heavily to keep the economy afloat. Now those bills come due. Sukuk are the chosen tool to roll them over.
Prime Minister Datuk Seri Anwar Ibrahim made that clear in his 24 February budget speech. He left the statutory debt ceiling unchanged. He signalled “no deviation” from the Islamic-first funding strategy adopted by previous administrations. Moody’s quoted Moore saying the authorities “have made clear that sukuk will continue to carry the load.”
Indonesia is close behind. Jakarta will issue US$18-20 billion of sovereign sukuk each year through 2024. That is below Malaysia but well above the US$12 billion annual average during 2020-2022. The finance ministry has already lined up US$5.5 billion of foreign-currency deals. Those are denominated in dollars and euros.
Together, Malaysia and Indonesia will pump roughly US$40 billion into the sukuk market annually. That combination eclipses Saudi Arabia’s share for the first time since 2017. Moody’s named Malaysia, Indonesia and Türkiye as the three largest sovereign sukuk issuers in 2023-2024. Saudi Arabia drops out of the top three.
Why does this matter? Sukuk are not bonds. They are asset-based or asset-backed certificates that pay returns from underlying assets rather than interest. The structures are more complex. The investor base is more concentrated. Yet both Malaysia and Indonesia are leaning hard on them.
Malaysia’s reliance is particularly striking. The country has long been a pioneer in Islamic finance. But the scale is new. Half of all federal borrowing through sukuk means the government is betting that demand will hold. So far it has. The pandemic proved that. Now the test is whether it holds through a period of higher global interest rates and tighter liquidity.
Moody’s did not answer that question. The rating agency just laid out the numbers. The numbers show a clear trajectory. Sukuk issuance will stay at record levels. The deficit will narrow only modestly. Refinancing needs will remain heavy. And the government shows no intention of shifting course.
The 24 February budget speech was the signal. Anwar Ibrahim could have raised the statutory ceiling. He could have signalled a shift toward conventional borrowing. He did neither. The Islamic-first strategy stays. The market will have to absorb it.
Indonesia’s path is less extreme but still substantial. Jakarta is stepping up its issuance well above pre-pandemic averages. The foreign-currency tranches suggest the government is also looking beyond domestic buyers. That diversifies the investor base. It also exposes the country to exchange-rate risk.
Both countries are essentially doubling down on a funding model that worked during the crisis. The question is whether it works just as well in calmer times. Moody’s forecast says the answer is yes — at least for the next two years. The numbers back that up. The policy statements back that up. The rest is execution.
