‘EXCLUSION ISSUE JUST SPECULATION’

Government will take action to ensure its bonds stay in WGBI, say observers

THE risks of capital flight from Malaysia are likely to be contained as the possible exclusion of the country’s bond from the FTSE Russell World Government Bond Index (WGBI) is merely “speculation”, said market observers.

Such a setback was also unlikely to affect Malaysia’s economic growth, they added.

They expect the government to do whatever is necessary to ensure that its bonds remain in the WGBI and send a positive signal to the global market on the quality of its debt instruments.

Bond index provider FTSE Russell has placed Malaysia under its

watch list for six months, with another review in September.

WGBI comprise sovereign debts from 23 countries, with four from Asia Pacific, namely Japan, Australia, Malaysia and Singapore.

Malaysia has been in the index since 2004.

Entry into the WGBI requires several criteria such as minimum credit rating of “A-” by Standard & Poor’s and “A3” by Moody’s, as well as Market Accessibility Level of 2 (2: highest; 0: lowest).

RHB Bank Bhd group managing director Datuk Khairussaleh Ramli said any possible exclusion was only a “speculation” and that the current bond yield did not truly reflect the fundamentals of the Malaysian market.

“I would say that few things need to be looked at, especially Malaysia’s strong foreign exchange reserves, current account surplus, well-supported oil price and low inflation rate, as all these factors should also be reflecting on the bond yield,” he told a press conference after launching the RHB mobile banking application, here, yesterday.

“Our bond market is very deep, in fact, one of the deepest in Asia, and any kind of volatility can easily be absorbed by real money fund in Malaysia. So I wouldn’t be too worried about the speculation,” he added.

AmBank (M) Bhd group chief executive officer Datuk Sulaiman Mohd Tahir is confident that the government will not allow any potential downgrade by FTSE Russell to happen.

“There will be a lot of engagements and discussions, (but) this thing is just speculation at the moment,” he was quoted as saying by Bernama.

The country’s fundamentals remained strong, supported by stable economic growth and commodity prices, he added.

Kenanga Research said FTSE Russell’s emphasis that the inclusion on its watch list was not a guarantee of future action should somewhat help soften the damage to investor sentiment.

“The statement suggests that enhanced engagement with the government, central bank and regulators in addressing investors’ concerns in the interim period. In this regard, we expect the government to do whatever is necessary, regulatory and policywise, to ensure that its bonds remain in the WGBI and, hopefully, send a positive signal to the global market in terms of the quality of its debt instruments,” it said in a note.

Kenanga Research said based on the International Monetary Fund’s estimate of US$2 trillion (RM8.3 trillion) of WGBI’s assets under management and Malaysia’s weightage of 0.39 per cent of WGBI, the estimated amount of funds at risk was US$7.8 billion.

The amount was equivalent to 8.3 per cent of total outstanding Malaysian Government Securities (MGS) and 21.4 per cent of total foreign holdings of MGS, it added.

The research firm said outflow of foreign funds could be anywhere between US$3 billion and US$5 billion.