*This article has been updated for accuracy*

KUALA LUMPUR (Jan 9): Strong foreign demand for Malaysian debt securities resulted in Malaysia enjoying an overall foreign portfolio inflow of RM8.8 billion in 2019 -- the highest since 2013 -- despite recording a net outflow in its equity markets.

In contrast, 2018 had recorded total foreign portfolio outflow of RM33.6 billion, according to SG-UOB Global Economics and Markets Research in a note today.

Foreign purchases of Malaysian debt securities jumped to RM19.9 billion last year (2018: -RM21.9 billion), making them the sole contributor to overall foreign portfolio inflows last year, which was more than enough to offset foreign outflows from the Malaysian equity market (2019: -RM11 billion; 2018: -RM11..7 billion)." 

The final month of 2019 saw foreign investors continuing to enter Malaysia's bond markets, with RM8.1 billion recorded -- after November's RM8 billion entry -- even as foreign outflows from Malaysian equities persisted, albeit with net selling narrowing to RM1.1 billion.

"The recovery was aided by looser global monetary policy and the US-China trade truce," SG-UOB said.

The breakdown by types of debt securities showed that the bulk of funds entered government bonds, which are Malaysian Government Securities (MGS) and Government Investment Issues (GII).

There were some flows into private debt securities, while treasury bills recorded net outflows, it said.

"Foreign holdings of Malaysian government bonds (MGS and GII) spiked up RM8.2 billion to RM185 billion in December. This was equivalent to 24.3% of total government bond outstanding (November: 23.4%), the highest level since May 2018.

"For MGS alone, foreign holdings amounted to RM163.9 billion (November: RM158.4 billion) which was equivalent to 41.6% of total outstanding (November: 40.5%)," it noted. As for GII, foreign holdings amounted to RM21.1 billion as at end-December (November: 18.4 billion), the highest level seen since December 2016. It was equivalent to 6.2% of total GII outstanding (November: 5.4%).

"Conversely, foreign ownership of Malaysian equities slid to its lowest level in more than two and a half years (Nvember 2019: 22.6%; end-2018: 23.4%)," SG-UOB said.

Meanwhile, it said Bank Negara Malaysia's foreign reserves ended 2019 at a five-year high of US$103.6 billion, given the record foreign portfolio inflows, higher current account surplus and sustained net foreign direct investments. The latest reserves position is sufficient to finance 7.5 months of retained imports and is 1.1 times Malaysia's short-term external debt.

While Bank Negara has yet to release its December 2019 foreign exchange (FX) swaps number, SG-UOB said the central bank's short position in FX swaps narrowed by US$600 million to US$13.3 billion as at end-November 2019 (end-October 2019: +US$200 million to US$13.8 billion). It also said November's FX swap short position was equivalent to 12.9% of total foreign reserves.

The ringgit, which recovered by 1% to 4.091 against the US dollar in 2019, could be weighed down by lingering trade conflicts and heightened geopolitical tensions, it noted. On Wednesday, the local note slid to close at 4.1010 against the US dollar amid escalating US-Iran tensions and the pending 'Phase One' trade deal between the US and China.

At press time, the ringgit was trading at 4.0907 against the greenback.