This article first appeared in The Edge Financial Daily on June 11, 2018

KUALA LUMPUR: The foreign holdings of Malaysian sovereign and corporate bonds, and bills fell by 6.3% to RM192.5 billion in May, the lowest level since August last year, and this could be due to the perceived uncertainties in the Malaysian market, according to Malaysian Rating Corp Bhd (MARC) chief economist Nor Zahidi Alias.

“The overall bond market has seen more net outflows in the past five months. Foreign net selling amounted to RM14.2 billion between January and May 2018, compared with net outflows of RM8.9 billion for the whole of 2017,” he said in an email exchange with The Edge Financial Daily.

He added that the large outflows were seen particularly in April and May, with outflows totalling about RM17.6 billion for those two months.

Nor Zahidi explained that the significant surge in the outflow was done ahead of Malaysia’s 14th general election (GE14) in May as foreign investors opt to stay on the sidelines while waiting for more clarity on government policies.

“For MGS (Malaysian government securities) alone, net foreign outflows totalled RM7.5 billion in the first five months this year, compared with net outflows of RM4 billion for the whole of 2017,” he noted, adding that the net foreign selling of MGS in April and May alone amounted to about RM9 billion.

This would mean that foreign holdings of both MGS and the Government Investment Issue were likely to have reduced from the 45.62% and 6.68% respectively, seen in the first quarter of this year.

On the recent changes seen in some of the institutions, like the resignation of Tan Sri Muhammad Ibrahim from his role as the central bank’s governor, Nor Zahidi believes that it is unlikely to cause changes in the country’s monetary policy.

“I do not think that the monetary policy direction will change significantly given that inflation is rather muted, and growth will remain relatively stable this year. In addition, the vacuum left by the governor of BNM (Bank Negara Malaysia) will not likely be too long before it is filled again,” he said.

Maybank Kim Eng fixed income research analyst Winson Phoon agreed with Nor Zahidi that the leadership transition is not expected to translate into monetary policy risks and that there should be no deviation from the existing monetary policy path.

He, however, noted that bond investors are closely monitoring the developments from here onwards.

“The MGS curve was little changed in reaction to the news. We have already been dealing with a lot of uncertainty and this probably doesn’t add up much to the heavy news flow on changes. Also, bond investors may be somewhat relieved by earlier news that the MoF (ministry of finance) maintained its fiscal deficit target at 2.8% of GDP (gross domestic product), which alleviates supply risks in the bond market,” Phoon added.

Ringgit weakness

As for the ringgit’s weakness, Nor Zahidi believes that it is primarily due to concerns over the reaction of international credit rating agencies (CRAs) to some of the new government’s fiscal adjustments.

Among some of those adjustments that sparked remarks by the CRAs include the zero-rating of the the goods and services tax, reintroduction of the sales and services tax as well as petroleum subsidies.

“In particular, CRAs are still making a careful assessment on how Malaysia’s fiscal path will look like in the medium term, whether revenue-generating measures will be announced in the near term and how the government can reduce unnecessary expenditure to offset the possible decline in revenue beyond 2018,” he added.

Nor Zahidi believes that more clarity is required at this juncture, which left the market guessing how the CRAs would rate the country’s sovereign rating moving forward.

The ringgit was among Asia’s worst performing currencies since GE14 — outperforming only the Philippine peso — falling by 0.97% to 3.9885 against the US dollar.