PETALING JAYA: The Malaysian Rating Corp Bhd (MARC) expects the amount of net foreign outflows to moderate in 2019, capped by the gradually increasing clarity in the Malaysian government’s macro policies going forward, a slowdown in the pace of interest rate hikes in the US and the increased stability of the ringgit.
“Going forward, uncertainties surrounding US-China trade, prospects of the US dollar, Brexit and the US government political gridlock as well as Malaysia’s moderating growth performance will likely affect foreign investors’ demand for local bonds,“ MARC said in a report today.
It said net foreign outflows from the local bond market surged in the first 11 months of 2018 to RM19.6 billion (Jan–Nov 2017: RM11.6 billion), thus bringing down total foreign holdings to RM187.1 billion (Jan–Nov 2017: RM204.0 billion).
Overall, foreign ownership of local bonds fell to 13.3% of the total outstanding (Jan–Nov 2017: 15.9%). This was mostly attributed to the lower foreign holdings in Malaysian Government Securities (MGS), which fell RM12.7 billion to RM147.6 billion (Jan–Nov 2017: RM160.3 billion) in the same period. By end-November, foreign ownership of MGS papers had declined to 38.8% (Jan–Nov 2017: 44.3%) of total MGS outstanding.
Foreign outflows from local govvies in the first 11 months of 2018 were also driven by slower Malaysian gross domestic product (GDP) growth in 2Q 2018 and 3Q 2018; rebound in US dollar; faltering crude oil prices; rising UST yields; and four US rate hikes that occurred in 2018.
Meanwhile, MARC envisaged yields for MGS and corporate bonds to increase slightly in 2019 when compared with 2018.
“However, we are of the view that the upside in yields will be capped by a low inflation rate; the expectation of a possible cut in the overnight policy rate amid weaker economic prospects; and limited upside of UST yields as the rate hike pace slows. Against this backdrop, we expect yields for the 10-year MGS to range between 3.9% and 4.4% in 2019.”
MARC expects total gross issuance of MGS/Government Investment Issues (GII) in the primary market to range between RM115 billion and RM125 billion in 2019, premised on the government’s projected budget deficit of RM52.1 billion, as well as higher volume of matured MGS/GII papers.
In 2018, total gross issuance of MGS/GII papers was up by 0.8% to RM114.8 billion (2017: RM113.9 billion).
Going into 2019, MARC also foresee gross issuance of corporate bonds to normalise to between RM80 billion and RM90 billion, premised on lower growth of public investment, a more moderate real GDP growth of 4.6% and slower pace of global investment.
“We also expect a material decline in gross issuance of unrated government-guaranteed and infrastructure-related corporate bonds following the government’s reprioritisation efforts.”
In 2018, total corporate bond issuance in the primary market fell to RM103.9 billion, down by 15.4% from the previous year (2017: RM122.9 billion), mainly attributed to a significant drop in the unrated segment.
Source: The Sun Daily