Sentiments positive towards new cabinet
KUCHING: Analysts are confident that the formation of the new cabinet will be well received by foreign investors, as can be seen by the improvement in the local currency government bond market.
In a report, economists at RHB Banking Group Bhd pointed out that based on its daily data for foreign inflows into the local currency bond market as well as anecdotal evidence, there has been a rising tide and they expect this trend to continue into early 2023 as sentiment towards the new administration’s policy framework will remain positive.
“The formation of the new cabinet is likely to be well received by foreign investors, which we believe have already been increasing their exposure to the local currency government bond market over the last few weeks.
“We expect this trend to continue into early 2023 as Budget 2023 will focus on fiscal consolidation, subsidies reduction, and improvement in the implementation of large infrastructure projects along with a larger allocation to the health sector.
“In addition, Malaysia’s key sovereign debt metrics such as resilient growth, well anchored inflation expectations, resilient balance of payments position, central bank credibility, and political stability are attractive for foreign investors,” said RHB Banking Group chief economist and head of market research Dr Sailesh K Jha.
“We remain overweight bonds, market weight equities, and underweight cash, a view we have held since April 2022. The balance of risks to our 1H23 average MGS10YR yield forecast of 4.00 to 4.30 is tilted to the downside.
“We continue to advocate adding positions to long duration bonds. Note that on a year-todate basis, MGS 10YR bonds are one of the top performing assets on a global and cross asset basis (Figure 3). We believe this outperformance could continue into early 2023.
“We believe foreign positioning is light and hence the potential for sizable capital inflows to the local currency government bond market is high. Some evidence of this, besides what Figure 1 is indicating is the relatively lower drop in MGS10YR yields compared to the rest of Southeast Asia.
“Hence, the first phase of a drop in MGS10YR yields was driven by local investors and the next phase of declining yields could be driven by a combination of foreign and domestic investors,” he added.
Meanwhile, on the re-tabling of Budget 2023, with the formation of the new cabinet, RHB Bank’s analysts believe the new Budget 2023 will likely be passed by the end of January.
“Few key areas would remain our focus; the rationalisation of government expenditure, any potential revision in project spending as well as the discussion on revenue resources under the new administration.
“We expect some rationalisation in operating expenditure (OE), with our eyes on certain aspects of OE; emoluments as well as subsidies and social assistance,” it said.
It also expected a more targeted approach towards subsidies might be implemented.
“Aside from a possible revision in fuel and food subsidies, the electricity subsidy might be reexamined as well.
“The prime minister further stressed that priority of subsidies was to ease the burden to the people, especially those in the lower-income bracket, in view of the rise in the price of goods and cost of living.
“We maintain our view that the adjustments pace is likely to be gradual in view of still elevated living costs and inflationary pressures.
“Cash transfers and consumer friendly type policies would continue to be in the budget as well,” it said.
On development expenditure allocation, it maintained its view that higher allocation of development expenditure (DE) could be tilted towards Sabah and Sarawak.
“In term of sectorial allocation, we would remain watchful on the DE allocation to the transport and healthcare subsectors. Potential revision of the allocation might be possible, especially those that are new and existing projects that have yet to start the tender process.
“For now, our base case is that some of the large-scale transport related projects are likely to be continued (ECRL, LRT3 and RTS),” it said.