This article first appeared in The Edge Financial Daily, on October 1, 2015.

KUALA LUMPUR: The country’s bond market would not crash even if foreign investors, who collectively hold 45% of government debt papers, decided to evacuate from Malaysia.

Bank Negara Malaysia (BNM) governor Tan Sri Dr Zeti Akhtar Aziz said that she does not foresee a collapse of the bond market with the consideration of a possible exodus of foreign funds.

Zeti reiterated that the redemption of government bonds by foreign investors would not impact the foreign reserves because the bonds are ringgit-denominated instruments.

“We have our own domestic institutional investors, like the Employees’ Provident Fund, Permodalan Nasional Bhd, Lembaga Tabung Haji. The insurance industry is also a major player in the bond market. 

“Our own institutional investors will step in to purchase those [bonds]. So we don’t expect any collapse in our bond market,” commented Zeti, when asked about concerns that foreign redemption would create havoc in the local bond market and make a dent in the country’s international reserves, which declined below US$100 billion (RM443 billion).

The BNM governor was speaking to reporters after making her opening remarks at the Malaysia-OECD High Level Global Symposium on financial well-being yesterday.

Zeti also said the country has shown its ability to intermediate between inflows and outflows of fund.

She illustrated that the country, which saw larger amounts of outflows during the global financial crisis in 2008/2009, was still able to intermediate those flows then.

“We had no disruption in credit flows, we had an efficient functioning financial system, and this demonstrated that we had reached a degree of maturity.”

“Therefore, the fact that if there is some sell-off of our bonds, we have a financial system that can still intermediate this kind of [outflows] without being disrupted. It still continues to function. It has not prevented corporations from raising funds nor has it disrupted credit supply,” said the governor.

Earlier, Reuters reported that there were RM11 billion of government bonds that matured yesterday. 

Foreign investors who hold about 45% of the outstanding bonds are seen to likely pull out their cash from the domestic market rather than reinvest in Malaysia due to political uncertainties and currency risk, Reuters said.

The country’s international reserves have contracted by US$25 billion as the ringgit has nosedived against the greenback, making it the fastest depreciating currency in the region.

Nevertheless, international reserves climbed slightly to US$95.3 billion as at Sept 15, 2015, from US$94.7 billion as at Aug 28, 2015.

On Tuesday, the ringgit breached a high of 4.457 against the US dollar. It closed at 4.395 against the greenback yesterday.

Also, Zeti reiterated that the central bank is not looking at capital control measures or a currency peg as measures to pull the break on the depreciating ringgit.

“If you peg the currency, something else will adjust. That means, it’s either prices or demand condition. And those might have greater cost on our economy.

“At this point in time, we are not envisaging that (any form of capital control measures). We have the market mechanism that adjusts, and what we want to demonstrate is that when we have fundamentals that can allow us to adjust. When the uncertainty subsides, then our currency will regain its strength,” she added.