FT RUSSELL BOOST FOR BONDS, RINGGIT
Malaysia stays on watch list but experts say another review is due in March next year
MALAYSIA has averted bigger capital flights for now after global index provider FTSE Russell yesterday kept the country’s bonds in its World Government Bond Index (WGBI), say economists.
They said the FTSE Russell decision was positive for the domestic bonds and ringgit but warned that Malaysia remained on its watch list until the next interim review in March next year.
UOB global economics and markets research senior economist Julia Goh said FTSE Russell and index users were encouraged by the Malaysian authorities’ efforts and engagement to address concerns over market liquidity and accessibility.
She said Malaysian bonds had been sold off since last week ahead of the FTSE Russell announcement and amid cautious mood surrounding the United States-China trade talks.
Goh said the Malaysian Government Securities (MGS) yield curve had steepened following the selloffs, although it was thought that foreign investors might deem the benchmark three-, five- and seven-year MGS yields — at 3.143, 3.281 and 3.378 per cent, respectively, on Thursday — as attractive under current low interest rate environment.
The total outstanding MGS expanded 14 per cent from RM357 billion in 2016 to RM408 billion as of August.
“There are more than 30 issuances in both new and reopenings in a year. By market size, Malaysia has the largest local currency government bond market within Asean,” said Goh.
She said Malaysia’s stable macro fundamentals and “A-” sovereign ratings had provided underlying support for domestic bonds.
Goh expects the US dollarringgit pair to move alongside the US dollar-yuan pair.
She also kept UOB’s view of ringgit trading at 4.19 against the US dollar by end of this year and 4.26 by middle of next year.
Meanwhile, MIDF Research is positive on FTSE Russell’s decision and expects the ringgit to gradually appreciate against the US dollar towards the end of the year.
The expansionary 2020 Budget announcement on October 11 would provide additional support to the estimate, it said.
The firm added that the US-China trade talks that would resume on October 10-11 would slightly calm the ongoing tensions.
Factoring all that, MIDF Research foresees the ringgit trading at 4.15 against the greenback by year end.
“Year-to-date, the ringgit has averaged at 4.13 per US dollar.”
Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the risk of a potential downgrade for Malaysia from a market accessibility rating of Level 2 to Level 1 was very much visible.
Thus, he said, trading in ringgit would continue to be volatile.
Kenanga Research also expects the ringgit to remain volatile and maintains its year-end target of 4.20 against the US dollar.
It said Bank Negara’s recent measures to improve hedging flexibility and give greater access to ringgit had been fruitful and managed to earn Malaysia some breathing room.
However, Kenanga Research said while Malaysia had loosened its currency hedging rules following FTSE Russell’s warning in April, the country might have to continue allowing greater access to its onshore ringgit market possibly via an eventual return to the non-deliverable forward market, for a start.
It said with Malaysia’s current weight in the index of 0.39 per cent, the estimated value of funds at risk was US$8 billion to US$9 billion. This was equivalent to 22 to 24 per cent of total foreign holdings of MGS.
The ringgit snapped four days of losses yesterday to end the week firmer against the US dollar.
It closed at 4.1860 compared with 4.1930 on Thursday.