The Relationship between Sukuk Bond and Gross Domestic Product (GDP) Growth Rate

Gross domestic product (GDP) is the sum of gross value added by all resident
producers in the economy plus any product taxes and minus any subsidies not included in
the value of the products. .
In the condition where GDP growth is high, the government tax revenue is usually
increases more rapidly, there will be higher return to investors. When GDP growth is
lower, the government revenue will be lower, this will decrease the capacity to pay
interest to Sukuk holders.
Based on the Trading Economics of China website, this is the graph to show the
China GDP growth rate over 2 years from 2012 to 2014.

Based on the market rate in China, now we discuss the Sukuk bond issued by
Axiata SPV2 Berhad whether the investor should invest within the period of two years.

The Sukuk bond is issued at 18 September 2012. On September of 2012 which is

last quarter of the graph in 2013, the GDP growth rate is 1.9%. Lower GDP growth rate
will decrease the return on investors, and then decrease the capacity of the company to
pay return to the investors. So, the investors may not invest the Sukuk bond when Axiata
SPV2 Berhad issue the bond to the public.
The best time to invest the Sukuk bond is on third quarter of 2013 which is the
period from July to September of 2013. This is because the GDP growth rate is highest
within 2 years which is 2.3% in third quarter of 2013. Due to the high GDP growth rate,
the company revenue will be higher and thus the capacity of the company to pay the
investor is higher. So, the investors can get more return if invest in the third quarterly of
2013. The investors may invest in this period.

The Relationship between Sukuk Bond and Interst Rate

The rate charged by banks on loans to prime customers is lending interest rate.

In 2008, the United States and other nations promoted policies intended to lower interest
rates
to stimulate their economies during the financial crisis whereas lower interest rates will
increase bond prices, leading to rapid economic growth, and increasing inflation. This
will eventually lead to higher interest rate and decrease the value of bonds due to the
negative relationship between interest rate and value of bonds. The Saudi Arabian
Monetary Agency (SAMA), in its report (2007), on the effect of interest rate on Sukuk,
stated that when reducing the interest rate less than the annual rate of return, the price of
Sukuk will increase.
The interest rate will affect the price of Sukuk. When the interest rate increase, the price
of fixed income securities for Sukuk will decrease whereas when the interest rate
decrease, the Sukuk price will increase.
The interest rate is a general economic indicator that will affect the Sukuk even though
Sukuk does not invest in interest bearing instruments. Interest rates can indirectly affect
the value of Sukuk. Besides that, Sukuk with longer maturity and lower coupon profit
rate are more sensitive to interest rate changes.
China Interest Rate
The Peoples Bank of China reports the Interest Rate in China. In November 21 st, PBOC
decided to cut the benchmark interest rate by 40 bps to 5.60 percent and the one-year
deposit rate by 25 bps to 2.75 percent. Policymakers also decided to increase ceiling for
deposit rates to 1.2 times the benchmark rate from the previous 1.1 times. In July of 2012,
Chinas central bank also cut the benchmark interest rate by 31 bps.
As the economy slows, it is the first rate cut in more than two years. There is an average
of 6.40 Percent of Interest Rate in China from 1996 until 2014 and only 5.31 Percent in
February of 2002. Interest rate is reaching an all time high of 10.98 Percent in June of
1996.

Actual
5.60

Previous
6.00

Highest
10.98

Lowest
5.31

Dates
Unit
1996-2014 Percent

Frequency
Daily

The Peoples Bank of China Monetary Policy Committee makes the interest rates
decisions in China. The PBC administers two different benchmark interest rates which
are one year lending and one year deposit rate.
Axiata SPV 2 Berhad
Axiata SPV 2 Berhad issue Sukuk on 18 September 2012 with coupon rate 3.75%. The
coupon type is semiannual. Generally, Sukuk does not invest in interest bearing
instruments but interest rate is indirectly affect the value of Sukuk. According to the
graph above, the market interest rate is higher than the coupon rate. Therefore, the value
of Sukuk is high. On the other hand, the Sukuk has a short maturity period (2 years from
2012 to 2014) and low coupon profit rate. Therefore, it is not sensitive to interest rate
changes.

The relationship between inflation rate and SUKUK bond

Inflation defined as a sustained increase in the general level of prices for goods and
services. It is measured as an annual percentage increased, as inflation rises the every
dollars buy a smaller percentage of good or service. Inflation is measured by the

consumer price index that reflects the annual percentage change in the cost to the average
consumer of acquiring a basket of goods and services that may be fixed or changed at
specific intervals. Inflation will reflects a reduction in the purchasing power per unit of
money.
The changes of inflation rate will influence the sukuk in Malaysia. When inflation
is stable, the fixed income structure of bonds can be particularly attractive to certain
investors whose risk profiles demand a steady real rate of return. The rate of inflation is
important as it represents the rate at which the real value of an investment is eroded and
the loss in spending power over time. Inflation also tells investors exactly how much of a
return (%) their investments need to make for them to maintain their standard of living.
Inflation affects an economy in various ways, both positive and negative. Negative
effects of inflation include an increase in the opportunity cost of holding money,
uncertainty over future inflation which may discourage investment and savings, and if
inflation were rapid enough, shortages of goods as consumers begin hoarding out of
concern that prices will increase in the future. Positive effects include ensuring that
central banks can adjust real interest rate to mitigate recession and encouraging
investment in non-monetary capital projects.
The relationship between the inflation and bond demand is an inverse
relationship, high prices will affect the purchasing power as the yield of bonds does not
cover rising prices. As for the coupon payment received, there is an inverse relationship
with inflation rate. During high inflation, the value of coupon is low.
Investors should try to buy investment products with returns that are equal to or
greater than inflation. With this idea in mind, investors should try to buy investment
products with returns that are equal to or greater than inflation. For example, a companys
stock returned 4% and inflation was 5%, then the real return on investment would be
minus 1% (5%-4%).

According to the graph above, the inflation rate of China in September 2012 is
approximately 1.7%, which is a drop of 2.8% compare to the beginning of the year. This
indicates that the low inflation rate will increase the purchasing power of investors.
Therefore, the investors should invest in Axiata SPV 2 Berhad s SUKUK bond when the
company issue their bond in 18th September 2012. The inflation rate fluctuated
throughout two years. However, the inflation rate dropped back to 1.6% at the maturity
date which is September 2014. Since the coupon rate of Axiata SPV 2 Berhad was fixed
at 3.75% , the higher the inflation rate, the lower the value of coupon received. It was
found that the highest inflation rate was approximately 3.2% during February 2013.
Overall, since the inflation rate of China from September 2012 to 2014 is always
lower than the yield to maturity of Axiata SPV 2 Berhad which is 3.75% , the investors
are not encouraged to invest in the SUKUK bond.