KUALA LUMPUR: The continuous slump of crude oil prices, coupled with a weaker ringgit — which touched its lowest since September 2009 at 3.5452 against the greenback yesterday — is likely to drive foreign investors away from the Malaysian bond market, opined local rating agencies.
Declining oil prices — which hit a fresh 5½-year low yesterday at US$55.36 (RM195.42) a barrel before edging back to US$55.42 at the time of writing — would theoretically drive bond prices higher and push yields lower as inflationary expectations subside, opined Malaysian Rating Corp Bhd (MARC) chief executive officer Mohd Razlan Mohamed.
“I believe that for now, bond investors are opting to stay on the sidelines, waiting for a clearer picture on the impact of lower oil prices on the Malaysian economy,” Razlan told The Edge Financial Daily via email.
He said investors could have concerns about the implications of the recent decline in crude oil prices on the government’s ability to shore up its finances and meet its fiscal targets.
“If oil prices continue to remain low for a considerable period in 2015, this could weigh on domestic economic growth and nominal gross domestic product, hence possibly inducing a revision in the budget deficit target for 2015,” he cautioned.
The benchmark Brent crude oil dipped more than half from US$115.06 a barrel on June 19. The ringgit too has depreciated 12.13% to 3.5452 yesterday against the greenback from 3.1463 on Aug 27 last year.
The local rating agency said it is expecting to see a flat to marginal growth in total gross corporate bond issuance next year ranging from RM80 billion to RM90 billion, mostly sustained by private investment. Comparatively, the estimated bond issuance by MARC was at RM80 billion for 2014.
On a more positive note, Razlan said, “while we believe an increase in the overnight policy rate to be unlikely, investors’ expectations for a hike in the Fed Funds rate by June 2015 will drive US Treasury yields higher next year, increasing the likelihood of higher MGS (Malaysian Government Securities) yields and interest costs on bonds.”
MGS are long-term interest-bearing bonds issued by the Malaysian government to raise funds from the domestic capital market for development expenditure.
Razlan observed that the dominant issuers in 2015 would likely come from the financial, infrastructure and utilities sectors based on a continuation of past issuance trends.
“While the bond market would face headwinds from the surging US dollar, the impact would be somewhat tempered by the low overall participation of foreign investors in the non-government segments of the domestic bond market,” he said.
However, he also noted that foreign participation in the government segment constitutes roughly 46% of total outstanding MGS.
“These holdings remain fairly sizeable due to the global liquidity injection.”
It is worth noting that the ratio of Islamic-to-conventional debt has remained flat at 76:24 in 2014 compared with the figure in 2013.
Meanwhile, RAM Ratings Services Bhd chief executive officer Foo Su Yin warned that a sustained depreciation in the ringgit, even if positions were fully hedged, would dampen investor sentiments and make the market less attractive to foreign funds.
“Most foreign funds are short-term and sensitive to market risks as they would need to swap out of ringgit when they repatriate their returns,” she told The Edge Financial Daily in an email.
She noted that for a long-term foreign bond issuer or investor, the exchange rate is but one of several factors that affect net returns. The primary driving factor is still yields.
“We expect gross corporate bonds to reach RM90 billion to RM95 billion in 2015,” she said, adding that private investments are expected to sustain the momentum and that the various infrastructure projects going on in the country will still require long-term funding through the bond market.
She predicts that the gross issuance of MGS to reach between RM100 billion and RM105 billion in 2015, a level similar to 2014, Foo noted.
Moving forward, some new bond
programmes might be established for refinancing purposes as some RM25 billion of bonds and sukuk are due to mature in 2015, she said.
Overall, foreign holdings of domestic bonds have been on the decline since August last year, due mostly to concerns over the resilience of global growth momentum and geopolitical risks, said Foo.
Foo said this has driven foreign investors to safe haven assets and hence, away from emerging economies.
“As at November 2014, the total value of foreign holdings of local currency debts stood at RM236.5 billion, which represented a 5.8% decline from the month before,” she said.
Bond Pricing Agency Malaysia Sdn Bhd (BPAM) chief executive officer Meor Amri Meor Ayob said, judging from the depreciation in the ringgit lately, offshore investors might have reduced their holdings again in November and December, although the quantum is still being measured.
“Any weaknesses in the bond market, especially in the MGS segment, provide a good opportunity for investors,” he told The Edge Financial Daily in an email recently.
As of Dec 5, 2014, the total issuance for unrated private debt securities (PDS) is approximately RM6 billion, while the rated PDS is roughly at RM69.5 billion, he said.
“Hence, the unrated PDS commanded about 7.9% of total PDS issuance thus far in 2014. During the same period, PDS issued under the Islamic principle is roughly at RM57.9 billion or roughly about 76.7% of total PDS issuance,” he added.
This article first appeared in The Edge Financial Daily, on January 6, 2015.