KUALA LUMPUR: The concerns surrounding the impact of the retreat in global oil prices on the Malaysian market have been overplayed and exacerbated the volatility in the local market this month, said Franklin Templeton Investments.

“I believe this concern has been overdone as we believe the reduction in oil revenue as a result of the drop in oil prices can be compensated by the removal of fuel subsidy in October 2014 and increase in revenue with the implementation of the goods and services tax (GST) by April 2015,” said Franklin Templeton Investments executive director and head of Malaysia fixed income and sukuk, Hanifah Hashim.

In a statement yesterday, Hanifah said the government has fiscal tools for manoeuvre at its disposal should the need arise as the government seems committed to balancing its budget by 2020.

Nonetheless, she expects a challenging year ahead for the fixed-income market in Malaysia amid better economic growth in the United States, growth woes in China and stagnant economic growth in Japan and the eurozone.

“Looking ahead, 2015 will be a challenging year for the fixed-income market in Malaysia as improving US economic growth, while it is good news, will eventually lead to a rise in US interest rate.

“A rise in the US interest rate could introduce some volatility in our local bond market as well,” she said.

Going forward, Hanifah said the Malaysian market could see liquidity support from Japan and the eurozone.

On Malaysia’s interest rate, she expects rates to “remain benign” as Bank Negara Malaysia would not want to risk economic growth and business and consumer sentiments by increasing the overnight policy rate too soon amid low global prices of oil.

While the implementation of the GST will increase inflation rate, Hanifah said lower oil prices will balance the inflation rate post-implementation.

“We remain positive on the Malaysian corporate credit and sukuk assets as the country’s fundamentals remain strong and our government has also shown willingness [to build] a strong fiscal position, especially [in] introducing unpopular measures that could result in short-term pain, but long-term gains,” she said.

This article first appeared in The Edge Financial Daily, on December 18, 2014.