KUALA LUMPUR (BLOOMBERG) - Prime Minister Najib Razak's plan to revive Malaysia's faltering economy is getting no help from the country's Islamic bond market.

Yields on government 10-year sukuk, used by companies to gauge the cost of Shariah-compliant financing, are at their highest level in 18 months relative to two-year securities, according to data compiled by Bloomberg. And with the slide in Brent crude prices sapping Malaysia's oil-export revenue against a backdrop of looming US interest-rate increases, investors say longer-term borrowing won't be getting cheaper anytime soon.

"With the US expected to raise interest rates soon, Malaysia's yield curve will remain steep next year," said Elsie Tham, a senior fund manager at Kuala Lumpur-based Manulife Asset Management Services Bhd who oversees more than US$1 billion. "Companies will find it challenging to raise funds because of slower economic growth."

That's bad news for MrNajib's government as it looks to simultaneously reduce the budget deficit and finance a US$444 billion public and private-sector spending programme at a time when the economy is growing at its slowest pace in two years. Islamic bond sales in Malaysia, the world's biggest sukuk market, dropped 56 per cent in the third quarter from the previous three months, according to data compiled by Bloomberg.

Investors are shunning 10-year sovereign sukuk as a sliding ringgit hurts sentiment and fuels capital outflows. The concern was reflected in a conventional sale of 2025 bonds last week that drew the fewest bids since December.

Ten-year Islamic bond yields climbed 14 basis points in 2015 to 4.41 per cent, shy of a record 4.53 per cent reached in September, while those on notes due in 2017 have declined 23 basis points to 3.40 per cent, central bank indexes show. The 101 point difference is the highest since March last year.

The economy expanded 4.7 per cent in the third quarter and growth is officially forecast at 4 per cent to 5 per cent in 2016 from as much as 5.5 per cent this year, according to the Finance Ministry.

"Slower growth, capital outflows and a weaker ringgit are contributing factors that will make it difficult for companies to raise funds next year," said Edward Iskandar Toh, chief investment officer for fixed income at Areca Capital Sdn., which oversees RM500 million in Kuala Lumpur. "Investors will want higher yields to compensate for the perceived deterioration in the credit profile."

The odds of a Federal Reserve rate increase in December have climbed to 66 per cent and global funds have already pulled RM33.7 billion from Malaysian stocks and bonds this year. Slowing growth in China, the nation's second- biggest export market, is further dimming the outlook. Brent crude prices have more than halved since last year's peak, making it more difficult for Mr Najib to meet his deficit-reduction target of 3.1 per cent in 2016 from an estimated 3.2 per cent this year.

The ringgit has also come under pressure this year amid a political scandal involving Mr Najib, who's received flak over a personal donation from the Middle East, as well as rising debt at state investment company 1Malaysia Development Bhd.

The cost for top-rated companies to borrow in the conventional bond market for 10 years has increased to 4.81 per cent from a 2015 low of 4.59 per cent in June, a Bank Negara Malaysia index shows. Average yields reached a four-year high of 4.87 per cent in September.

"It will be challenging for market debutants, greenfield financiers and unfamiliar names as investors may be asking for higher returns to compensate for both liquidity and credit risk," said Fakrizzaki Ghazali, a Kuala Lumpur-based strategist at RHB Research Institute Sdn., a unit of the country's top sukuk arranger RHB Capital Bhd. "Nonetheless, demand for high- uality names will remain favorable."