KUALA LUMPUR (March 27): Malaysia is considering easing rules on the short-selling of government bonds to deepen domestic financial markets and revive interest in its debt.

Bank Negara Malaysia will allow companies and insurers to short sell sovereign bonds to help them manage their interest-rate exposure and generate more trading volume, Assistant Governor Adnan Zaylani Mohamad Zahid said in an interview on March 24. The central bank is still "providing liquidity" to the currency market after measures last year to discourage speculators limited activity in the ringgit, he said.

Policy makers are seeking new ways to develop Malaysia’s markets and bring in funds after some investors fled in the wake of a crackdown on trading of offshore non-deliverable ringgit forwards in November. Global funds have pulled more than RM35 billion (US$8 billion) from Malaysian sovereign bonds in the four months through February, the longest stretch of outflows since 2014, while adding to holdings of other regional markets.

The move to allow corporates and insurers to short-sellgovernment debt would boost liquidity which “also benefits foreign investors who operate in the onshore bond market,” Adnan said. “We’re hoping to build the liquidity in the onshore market, and by also undertaking further liberalization of the onshore market we will go to some extent in that direction.”

The central bank is also planning to revise regulations to make it easier for small- and mid-sized companies to hedge.

Ringgit Rebound

The ringgit has rebounded from a 1998 low, with a 1.7% gain this year helping it to outperform the Philippine peso and the Indonesian rupiah. It trails other Asian currencies including the Thai baht, the Indian rupee and the South Korean won.

Adnan said policy makers aren’t concerned as “the ringgit market is still adjusting” and its stabilization is occurring within the three- to six-month time frame authorities had expected for its recent measures to yield results.

“We are providing liquidity quite regularly,” Adnan said. “That’s probably going to be the case until the market stabilizes. It looks like the ringgit is more stable. Some of the market indicators have improved so as we go forward Bank Negara can take a step back as well eventually.”

Bank Negara has taken steps since the November crackdown to provide greater hedging flexibility in the onshore currency market and pledged to continue developing the market. Exchange rate volatility has eased with the average intraday movement falling to about 53 points in January from 82 points in December, according to the nation’s Financial Markets Committee.

The bid/ask spread on Malaysian bonds has narrowed to 20 sen to 50 sen from a peak of RM2 after the US election, the committee said.

The central bank said this month that non-resident holdings in the bond market are gradually declining and were at 28.7% of the total as of end-February, from a 2016 peak of 34.7%. Foreign ownership will probably comprise more of long-term holders from now, Adnan said.

"We would expect the bond market to show more stability and the FX market to be more stable because we don’t have the short-term inflows and outflows driving the market," Adnan said.

While the prohibition on the offshore NDF market wasn’t new, investors such as PineBridge Investments said the clampdown made it hard to counter currency risk while Brown Brothers Harriman warned markets may draw parallels with the capital controls Malaysia imposed during the 1998 Asian financial crisis.

More time may be needed to reverse the current negative sentiment toward Malaysia despite policy makers’ commitment to roll out further liberalization measures, Lawrence Lai, Asia rates strategist at Standard Chartered Plc in Singapore, wrote in a report last week.

If the ringgit is accurately reflecting Malaysia’s economic fundamentals, it should be stronger than the current level, the assistant governor said.

"Growth is not at its strongest point, but certainly the degree of ringgit weakening that we’ve seen in the past had been excessive," Adnan said. "It is being more driven by the NDF market which tends to spiral very quickly in times of uncertainty."