FTSE Russell says that it could drop Malaysia from the WGBI, rattling investors to dump RM8b of MGS

by NG MIN SHEN/ pic by ARIF KARTONO

MALAYSIA’S central bank has introduced more initiatives to boost market accessibility and liquidity as worries linger over FTSE Russell’s threat to drop the country from its FTSE World Government Bond Index (WGBI).

The global bond index provider announced in April that it could drop Malaysia from the WGBI, rattling investors who scurried out the country and dumping close to RM8 billion of Malaysian Government Securities (MGS).

FTSE Russell had cited concern over market accessibility as the decision for the review.

Malaysia has been placed on the fixed income watch list for at least six months, before a decision is made. A decision is expected in September.

Bank Negara Malaysia (BNM) governor Datuk Nor Shamsiah Mohd Yunus (picture) said the central bank has engaged FTSE Russell over this concern.

“We have had very positive engagements with FTSE Russell. They were very appreciative of the measures we have put in place to deepen the onshore market so that real money investors have the required access to hedging onshore.

“They have also engaged with investors, and investors have given them the same feedback,” she said when announcing the country’s second-quarter GDP figures in Kuala Lumpur last Friday.

The central bank has also introduced foreign-exchange (forex) administration (FEA) liberalisation measures to support the business efficiency.

On whether FTSE Russell has indicated that Malaysia would remain in the WGBI, Nor Shamsiah said: “It’s their call”.

The central bank’s latest measures are aimed at further deepening the onshore market to provide greater flexibility for investors to trade after trading hours.

These include an improved ringgit accessibility after onshore trading hours via appointed overseas offices (AOOs) for non-resident investors and corporates, while principal dealers will quote all off-the-run bonds available under the bank’s securities operations, in addition to their existing commitment to provide quotes for benchmark bonds.

A standard documentation guide for forex transactions will be made available for convenient reference by market participants. Greater flexibility (longer tenure limit and wider range of repo securities) will also be proposed under the revised repo guidelines.

Meanwhile, the FEA policy liberalisation is aimed at providing greater flexibility and efficiency for businesses to better manage their forex risk and conduct their daily operations.

Residents can now hedge their forex current account obligations up to their underlying tenure, and may obtain approval from BNM to hedge financial account obligations up to the underlying tenure.

To facilitate greater efficiency in centralised risk management operations, treasury centres in Malaysia are free to hedge on behalf of their related entities via a licensed onshore bank.

Non-resident treasury centres outside Malaysia can hedge on behalf of their related entities in Malaysia and overseas via a licensed onshore bank or AOO, upon one-time registration with BNM.

Further, credit facilities which are used by corporates for miscellaneous expenses such as sundry and employees’ travel expenses are excluded from domestic ringgit borrowings under applicable FEA policies on investment abroad. The above measures will be effective on Aug 30, 2019.