Weak business sentiment indicators, as reflected by the recent PMI data, will keep companies wary of their gearing levels

By MARK RAO / Pic By TMR File

Corporate bond issuance in Malaysia will fall in 2019 year-on-year (YoY) as companies look to avoid raising their debt amid fears of slower economic growth and investments domestically and globally.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the weak business sentiment indicators, as reflected by the recent Purchasing Managers’ Index (PMI) data, will keep companies wary of their gearing levels.

“Profit margins will be challenged by uncertainties in the economy amid higher operating costs including rising minimum wage and raw material prices amid intense competition in all industries,” he told The Malaysian Reserve.

“Therefore, corporate bond issuance is expected to be stable this year as private firms are unlikely to go big in their capital expenditure plans.” AmBank Research is anticipating gross issuance of corporate bonds to hover around RM80 billion to RM90 billion in 2019 on softer public investment growth, moderate domestic GDP growth of 4.5% and the slower pace of global investment.

The research house expects a material decline in gross issuance of unrated government guaranteed and infrastructure-related corporate bonds following the government’s reprioritisation efforts.

In 2018, a total of RM109.3 billion worth of corporate bonds were issued in the primary market — down 10.4% YoY from the RM122 billion worth issued in 2017 — owing to the decline in financing activities.

Unrated corporate and unrated government guaranteed bonds declined that year to RM13.9 billion (down 32.8% YoY) and RM28.7 billion (down 23.7% YoY) respectively.

While corporate bond issuance is expected to fall this year, Malaysian government issues are predicted to pick up as Putrajaya looks to address its sizeable fiscal deficit.

Mohd Afzanizam said a higher budget deficit level will translate into an increasing need to issue new debts or even refinancing maturing liabilities.

Issuance of Government Investment Issues (GII) amounted to RM55.9 billion in the first 11 months of 2018 — up 9.2% YoY.

He noted that there was a decline in issue of Malaysian Government Securities (MGS) to RM49 billion over the same period last year from RM51.2 billion in the 11 months of 2017.

“It was quite mixed last year, but we believe the issuance of government bonds should be better this year in view of higher fiscal deficits and good demand from institutional investors,” he said.

The key risk factor to look out for would be the trajectory of the US federal funds rate and energy prices.

AmBank Research foresees total gross issuance of MGS and GII to hit RM115 billion to RM125 billion this year compared to RM114.8 billion issued in 2018. The forecast is based on the government’s RM52.1 billion fiscal deficit projection and higher expected volume of maturing MGS and GII papers at RM69 billion versus RM62.8 billion in 2018.

AmBank Group chief economist and head of research Anthony Dass said the downside risks to the forecast are interest-rate cuts, external risk increasing and strong outflow of funds.

In 2018, the local bond market recorded a net foreign outflow of RM21.9 billion, while total foreign shareholdings of local debt fell 13.5% to RM184.8 billion.

More hawkish central banks, trade tensions, a stronger US dollar, weaker crude oil prices, fears of an emerging- market debt crisis and slower GDP growth in Malaysia were factors behind the drop, AmBank Research said.

The research firm expects foreign outflow to moderate this year.

“Uncertainties surrounding the US-China trade, prospects of the US dollar, Brexit, the US government political gridlock, elections and the Chinese economic outlook together with Malaysia’s moderating growth will likely affect foreign investors’ demand for local bonds,” it said.

It said new foreign outflow will be cushioned by a gradual increase in the clarity of the Pakatan Harapan government’s macro policies, slower pace of interest-rate hikes by the US Federal Reserve and prospects of a more stable ringgit.