Inflows in debt vehicles issued by Muslim Southeast Asian nations have increased in the recent past as investors shun troubled Western market, irritated by Brexit-related uncertainty in Europe, record-low interest rates, negative sovereign bond yields and a further delay of interest rate increases by the US Federal Reserve.
In that environment, Malaysia, the world’s largest sukuk market, and Indonesia, an aspiring next heavyweight in the Islamic finance industry, are greatly benefiting from their current monetary easing policies, relaxed tax policies and stimulus through government infrastructure spending programs.
Indonesian bonds, for their part, were 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 July 20 helped drive gains in that nation.
Malaysia’s RHB Investment Bank, the country’s second-biggest Islamic bond arranger, believes that Islamic bond sales will more than double over the next six months to a total of around $15.7bn after the unexpected interest rate cut by the new central bank governor Muhammad Ibrahim. 
Huge infrastructure projects contribute to these high expectations. 
RHB, besides CIMB, AmInvestment Bank and Maybank, is among the country’s top banks to have been selected as underwriter for the massive, sukuk-financed $6.6bn-project of the Pan-Borneo Highway crossing Malaysia’s state of Sarawak and connecting it to Brunei and Sabah, for which the banks will issue an initial $3.2bn Islamic medium-term note program to kick off works.
The project in Borneo adds to other sukuk issuances, among them a $1.3bn-offer by energy producer Sarawak Hidro, the state-owned developer of Malaysia’s biggest hydropower project, also on Borneo Island.
Other infrastructure sukuk in the queue are a $440mn-issuance from the operator of the 24-kilometer bridge connecting Peninsular Malaysia with Penang island, a $892mn-issuance for a highway network in Malaysia’s industrial hub of Klang Valley, and more sukuk from the private sectors, including education and insurance, as well as telecom which will see a $2.5bn-issuance by Malaysian telecom firm Maxis.
DanaInfra Nasional and Prasarana Malaysia, developers and financiers of the extension of Kuala Lumpur’s subway and elevated rail networks, are also among the top sukuk issuers this year. The Kuala Lumpur-Singapore high speed train project will be another big investment opportunity into sukuk over the next decade.
Altogether, issuances of Shariah-compliant bonds in the world’s largest sukuk market rose 19% in the first half of this year to $7.2bn from the year-earlier period.
Indonesia’s government is also enlarging the scope of sukuk-backed investment in roads and railways in the wake of a broader stimulus programme initiated by President Joko Widodo. Indonesia’s finance ministry just sold some $412mn worth of Islamic bonds at an auction, one third above its target. 
The weighted average yield for government sukuk maturing in January 2017 is currently above a healthy 6%, the highest in Southeast Asia. Overall, Indonesia needs to spend $500bn over the next five years to build roads, railways and power plants, and the state budget is only capable of contributing 30%, which means that a large number of future issuances can be expected, with its uptake spurred by generous tax incentives. The Indonesian government is further considering cutting taxes to zero for all local-currency sovereign bonds from 15% for domestic investors and 20% for international ones.
Analysts say that such incentives are necessary for Indonesia to kick-start new initiatives in its Islamic finance sector. Overall growth in Shariah banking assets in the country picked up 4% last year.
“Indonesia offers great returns for investors chasing yield,” said Fakrizzaki Ghazali, analyst at Kuala Lumpur-based RHB Research Institute, adding that he also saw “limited downside potential for Malaysian sukuk yields.”
Another bonus for foreign investors in Malaysian and Indonesian sukuk is the fact that both countries’ currencies are recovering steadily from their heavy losses from the “China shock” last year. Malaysia’s ringgit gained more than 8% this year, and Indonesia’s rupiah advanced 5.3%, pumping up profits for foreign investors further.