Malaysian bonds stay attractive – foreign holdings at 25%

INVE$T #58 | Market Sentiments – 21 May 2021


According to Securities Commission (SC) chairman Datuk Syed Zaid Albar, Malaysian bonds continue to attract interest, with foreign holdings amounting to 25% of outstanding government bonds. As at end April 2021, foreign investment in the government bond market stood at RM232bil. In his keynote address at the MARC virtual Malaysian bond and sukuk conference themed “Riding the Wave” he noted the SC has long recognised the role of private debt securities as a source of funding, particularly for large-scale, long-term projects. It also increases private sector participation in economic development. According to the Asian Development Bank, in gross domestic product (GDP) terms, the three largest bond markets in Asia are Japan, followed by South Korea and Malaysia. Given the outlays required for infrastructure development, opportunities abound for the Malaysian bond and sukuk markets to continue to be a major funding source for nation building initiatives. This, however, is not unique to Malaysia. In fact, 79% of the respondents to the 2020 Global Infrastructure Index believe that infrastructure investments will be one of the main drivers that will create new jobs and boost their economies. At end2020, the domestic bond market grew to RM1.6 trillion (government bonds constituting 53% and corporate bonds 47%) despite the challenging environment, up from RM1.49 trillion as at end2019. While this augers well for the country’s recovery and future growth, more needs to be done for growth to be sustainable. There was a need to broaden the credit spectrum to include smaller bond issuers, given the significant contribution of MSMEs (micro, small and medium enterprises) to GDP and employment. The challenge is adapting the bond and sukuk markets to provide cost-effective means for small and lower-rated issuers to raise funds to meet their growth and expansion plans. This is particularly important because the greater or more inventive use of traditional assets alone will not be enough to foster better growth. Securitisation transactions embedded with the necessary safeguards had the potential to be a valuable financing tool, transforming illiquid assets into liquid and tradable assets.

Malaysia’s economic performance doesn’t depend only on Covid-19, MCO impact: MARC research head

According to Malaysian Rating Corp Bhd (MARC) head of economic research Firdaos Rosli, Malaysia’s economic performance depends largely on internal and external factors, and not only on how the Covid-19 pandemic and the movement control order (MCO) play out. There have been narratives by economists and opinion makers that the country’s economy is dependent on the MCO, given its impact on business activities and the economy in general. However, it is not really dependent on the pandemic per se as all economic sectors are open, even with the MCO in place. He was presenting on ‘Economic Report & Capital Market Outlook 2021’ at the MARC Malaysian Bond and Sukuk Conference 2021. We are seeing that economic activities are running as usual, and that will give some rebound compared to what it was in the previous year. Externally, the performance of Malaysia’s economy is linked to its major export markets. Major trade partners such as the US and the UK have ramped up their Covid-19 inoculation drive, which will translate into heightened demand for Malaysian exports, particularly for electrical & electronic and petroleum products. There has not been much communication on the government’s medium to long-term economic action plan as it is busy fighting the pandemic. There is the need for signals on policy since the pandemic differs from the Asian and the global economic crises in the past, which were due to financial and trade factors. This crisis is non-financial and non-export led, which means that as the balloon is squeezed, the economy will still be in contraction mode. The country will see continued positive growth in the future as the government eases the restrictions. On foreign direct investments (FDI) in equities, the foreign investors have left the market, but in the debt market there has been a healthy inflow since the start of the year. However, for manufacturing FDI, it is a completely different perspective altogether. As far as incentives are concerned, what Malaysia has been offering are generic, whether it is pioneer status or tax perks, as there is nothing it can offer that its neighbours cannot. To gain a competitive edge, there has to be something “magical” that the government can offer to attract such investments. The country can examine the trade agreements which it has participated in but has yet to ratify, such as the Comprehensive and Progressive Transpacific Partnership and the Regional Comprehensive Economic Partnership, to obtain such advantage. While this would be one way to look at it, the other is the autonomous liberalisation route, similar to what was done in the 1980s following the commodity crisis, where liberalised foreign equity in manufacturing allowed 100% equity to foreign manufacturers. But such a move will require indepth policy justification. On the possibility of more stimulus measures, his educated guess was that they will be related to the social security net, particularly with regard to employment and the job market. This was in reference to Finance Minister’s statement that the reason behind the government’s decision to keep the economy open was primarily to address the unemployment rate. Noting that in the past, the unemployment rate following a crisis is responsible for projecting the country’s growth trajectory in the post-crisis era. The country would likely see slow growth in private consumption if it is not able to contain the unemployment rate this time around. However, he is not sure that more cash handout is the answer as people are likely to turn it into savings but it is left to be seen what the government has in store.

Eye On The Markets This week

On Thursday (20May), the Ringgit was 4.1443 against the USD from 4.1310 on Monday (17May). Meanwhile, the Ringgit was 3.1085 to the Sing Dollar on Thursday (20May). On Monday (17May), the FBM KLCI opened at 1577.49. As at Friday (21May) 10:00am, the FBM KLCI is down 12.42 points for the week at 1565.07. Over in US, the overnight Dow Jones Industrial Average closed up 188.11 points (+0.55%) to 34,084.15 whilst the NASDAQ added 236.00 points (+1.77%) to 13,535.74.

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