Ailing ringgit bonds await lifeline from Malaysia policy review


THE case is growing for Bank Negara Malaysia (BNM) to bolster the economy with another interest-rate cut — and to provide some much-needed encouragement for inflows to the ringgit bond market.

The central bank’s review this week will be scrutinised by global funds, with any hint of a dovish tilt likely to rekindle interest in Malaysian bonds.

Slowing exports and tepid inflation have raised expectations that policymakers will need to consider adding to May’s quarter-point cut at some point in 2019.

Overseas investors sold a net US$650 million (RM2.69 billion) of Malaysian bonds in the first five months this year, taking foreign holdings of the nation’s debt to the lowest since 2011.

They’ve been pumping money into higher-yielding Indonesian debt and Thai notes, which are regarded as a haven play.

Ten-year Malaysian government bonds offered 3.63% as of 4:05pm in Kuala Lumpur last Friday, a substantial premium to lower-risk Thai notes around 1.99%, but significantly lower than the 7.23% for similar-maturity Indonesian debt and 6.67% for Indian notes.

The need for BNM to resuscitate demand has been more acute since April, when FTSE Russell warned that it may drop ringgit debt from its benchmark global bond index, citing market liquidity problems.

While tomorrow’s policy review is unlikely to bring an immediate cut in rates, the policy statement will be parsed for indications that a lower benchmark is on the horizon.

Exports, which account for 70% of GDP, have shown monthly contraction twice already this year, adding to the case for monetary easing. Public and private investment is waning and inflation has been stuck below 1% since mid-last year.

At the last review on May 7, the central bank struck a broadly neutral tone, saying the 25-basis point reduction to 3% was intended to “preserve the degree of monetary accommodativeness”.

In addition, 21 of 24 economists surveyed by Bloomberg expect BNM to keep the benchmark rate unchanged tomorrow. Three forecast a 25-basis-point cut.

To be sure, even if the economy continues to slow, BNM may try to stand pat until there’s greater clarity on how deep any US interest-rate cuts will be. The ringgit’s weakness — it has underperformed most Asian currencies this year — may also give policymakers cause to wait. — Bloomberg