Malaysia: Rate hike to boost foreign buying of govt bonds

PETALING JAYA: A rise in benchmark interest rates and the strengthening ringgit is expected to lure more foreign investors to buy Malaysian government bonds, which will result in a net positive inflow of foreign funds towards the end of this year.

Foreigners hold around a quarter of Malaysian government bonds, down from the high of 34.7% recorded in November 2016. Up until last September, foreigners held 42.8% of total outstanding Malaysian Government Securities (MGS).

Malaysian Rating Corp Bhd (Marc) chief economist Nor Zahidi Alias expects foreign holdings of sovereign bonds to continue rising towards the end of this year and record a net positive inflow.

He added that higher oil prices and interest-rate normalisation will also be factors in foreign investors showing interest in Malaysian sovereign bonds.

Marc expects gross issuance of MGS/Government Investment Issues (GII) in 2018 to com in within the range of RM100bil to RM105bil based on budget deficit estimate of RM39.8bil, a projected RM62.8bil worth of MGS/GII maturing this year and the forecast of GII-to-MGS ratio of 44:56.

Foreigners will also be watching out for economic growth, which Marc expects to grow by 5.3% this year with inflation hovering around 3%.

Consumption-led domestic economic growth and expected US rate hikes also lend support to the possibility of a rate hike by Bank Negara this year. Zahidi expects Bank Negara to raise the overnight policy rate (OPR) by between 25 and 50 basis points. This will raise the OPR to 3.25% or 3.50%.

Meanwhile, Marc foresees total gross corporate bond issuance this year to come in between RM90bil and RM100bil. “The primary market is expected to take a breather in 2018 following a bumper year in 2017 when issuers had rushed to raise funds given the prospects of monetary policy normalisation and therefore likely higher borrowing costs ahead.

Our current forecast, which is slightly higher than our earlier projection of between RM85bil and RM95bil, is premised on expectations of a sturdy pipeline of issuances from the government guaranteed segment related to the financing of current and new large-scale infrastructure projects,” Zahidi said.