By MARK RAO

Malaysian Rating Corp Bhd (MARC) forecasts local government bond issuance to come within the RM105 billion and RM110 billion range this year, supported by the stronger foreign buying interest and continued support from local institutional funds.

The rating agency said demand for Malaysian Government Securities (MGS) and Government Investment Issues (GII) in the primary market is driven by the stronger ringgit, improving domestic economic fundamentals and Bank Negara Malaysia’s (BNM) announcement of financial market initiatives.

MARC said buying interest is skewed towards GII papers, with investors seeking attractive returns through the widening MGS and GII spread.

In the first-half of this year (1H17), government bonds totalled RM57.5 billion, comprising RM27.5 billion MGS and RM30 billion GII respectively, 12.7% higher than the total issue in the corresponding period last year, according to the report.

It noted RM49.5 billion of the total issuance in 1H17 was through 16 public offerings in the auction market, while the remaining RM8 billion was raised via private placements.

“The higher total issuance was largely due to higher issuances of GII, which grew by nearly one-third from 1H16,” MARC said.

“This is evident in the GII-to-MGS ratio for 1H17, which rose to 52:48 from 45:55 in the same period last year.”

The agency added that the average bid-to-cover ratio for all government bond auctions rose to 2.36 times in 1H17, compared to 2.28 times in 1H16.

MARC’s forecast of government bond issuance to hit as high as RM110 billion this year is based on the Ministry of Finance’s budget deficit projection of RM40.3 billion, as well as the RM66.8 billion of MGS and GII maturing this year.

“Taking all this as well as the total funds raised in the first six months of the year into consideration, the average issue size of each government bond offering in 2017 will likely come in between RM3 billion and RM3.3 billion,” it said.

The rating agency further anticipated foreign holdings of government bonds to rise at a moderate pace for the year, on the back of rising interest in the ringgit, improving domestic economic fundamentals and market-friendly initiatives of the government, including central bank BNM.

“With the US Federal Reserve continuing on its monetary policy tightening path, as well as expected further releases of positive US economic data, we envisage the pickup in foreign holdings of local bonds to be moderate.”

The local government bond market is also anticipated to experience less volatility in the near term, following the heavy sell-off by foreign holders between November 2016, and March this year, MARC said.

It said the country’s benchmark Overnight Policy Rate will likely remain at 3% for the rest of the year, on the back of the domestic and external economic outlooks turning positive.