KUALA LUMPUR: Malaysia Rating Corp Bhd (MARC) foresees the ringgit to be affected by the impact of foreigners’ unwinding their holdings of malaysian government securities (MGS) in the near term.

“As such, we see a limited upside to the ringgit in the second half of 2015 (2H15),” said the rating agency’s fixed income analyst Nick Lee Chin Fah in MARC’s 2H15 bond market outlook report yesterday.

However, Lee stressed that the impact on the ringgit, which has depreciated below 3.8 against the US dollar, would be “short term”.

“At this juncture, foreign funds are the biggest holders of MGS at almost half of total MGS outstanding, more than the holdings of local pension funds. While we acknowledge the potential risk of high foreign holdings of MGS, we do not see this as a major concern,” Lee commented in the report.

According to the report, foreign shareholding of MGS soared to a record high of RM158.2 billion in 1H15, or about 46.9% of the outstanding amount, despite lingering concerns about an interest rate hike by the US Federal Reserve (Fed) and a possible downgrade by Fitch Ratings back then.

Foreign holdings of government investment issues (GII) has also surged to an all-time high of RM10.9 billion, or 5.3% of the outstanding GII in the market, from a mere RM5.3 billion, or 2.8% of the outstanding amount, at the start of the year. Lee explained that the high foreign holding of MGS does not pose a major concern because the presence of large domestic institutional investors will serve as a strong buffer against external shocks, mitigating the impact on the financial market should there be a significant reversal of foreign flows.

Also, he believes that foreign investors have “more or less” shrugged off short-term adverse developments, but focused on the country’s long-term economic fundamentals when investing in local government bonds.

On the government’s debt servicing capacity, Lee highlighted that about 43.1% of total outstanding government debt has a remaining maturity of more than five years.

“Although total government debt registered a miniscule increase to RM596.8 billion in 1Q15, the current debt maturity profile, which has long averaged remaining maturities, is supportive of the government’s debt servicing capacity, reflecting manageable exposure to adverse developments in the financial market,” Lee commented.

MARC is forecasting yields of MGS to rise to between 4.1% and 4.5% in 2H15, mainly due to the Fed’s expected interest rate hike this year.

Lee does not expect the rise in MGS yields to climb substantially.

“We believe the rise in [MGS] yields would not be too significant as stable macro fundamentals, massive stimulus measures by the European Central Bank and the accommodative monetary policy stance by the regional central banks would keep the yields in check.

“We are also of the view that domestic institutional investors will provide support to local government bonds should there be a significant rise in yields,” said Lee.

MARC expects inflationary pressure to remain contained despite an expected pickup in 2H15.

“Against a backdrop of relatively stable economic growth of circa 4.7%, we expect Bank Negara Malaysia to hold the overnight policy rate at 3.25% throughout 2H15,” it said.

This article first appeared in The Edge Financial Daily, on July 9, 2015.