Malaysia expected to remain on WGBI

BNM has introduced a slew of initiatives to boost market accessibility and liquidity


MALAYSIAN government bonds are expected to remain on FTSE Russell’s world index following the deepening of the country’s onshore market — a major relief for the local bond market which is at risk of an exodus of foreign investors.

In April this year, FTSE Russell said it could drop Malaysia from its World Government Bond Index (WGBI) following its review this month, citing concern over the accessibility of the country’s fixed income market.

Malaysia’s central bank, Bank Negara Malaysia (BNM), has since moved to introduce a slew of initiatives to boost market accessibility and liquidity while further liberalising the foreign-exchange administration (FEA) policy.

These measures could potentially protect the local bond market from billions of ringgit worth of capital outflow if they are deemed sufficient for FTSE Russell to keep Malaysian government bonds on the WGBI.

AxiTrader Asia-Pacific market strategist Stephen Innes said the liberalisation of the FEA was likely part of the negotiations held between BNM and FTSE Russell.

“I believe the central bank has been in touch with the FTSE Russell to discuss. There are many behind the scenes discussions going on and I’m sure the liberalisation of the FEA was part of the deal,” he told The Malaysian Reserve (TMR).

“I think locals would be a better seller if things didn’t look positive.”

Last month, BNM governor Datuk Nor Shamsiah Mohd Yunus told reporters the central bank engaged FTSE Russell in regards to prospects that Malaysia could be dropped from the WGBI when the review is conducted at the end of this month.

“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,” she was reported as saying.

When asked if FTSE Russell indicated that Malaysia will remain in the WGBI, she responded, “It’s their call.”

Malaysia is currently assigned a ‘2’ rating and has been included in the WGBI since 2004, but is being considered for a potential downgrade to ‘1’, according to FTSE Russell back in April this year.

Subsequently, the country was placed on its fixed income watch list for at least six months but FTSE Russell noted this is not a guarantee of future action.

Innes said traders and fund managers are taught to price-in worst-case scenarios and would likely have reduced their exposure to Malaysian government bonds in the eventuality that Malaysia is excluded from the WGBI.

“There will be a knee jerk reaction but local insurance funds, et cetera, will be waiting with open arms to snap up the sell-off, so (there will be) a few hours of panic before it returns to business as normal,” he said.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said BNM will pay close attention to this eventuality as it could if it were to materialise, have an impact on capital flows, especially for passive foreign funds that track Malaysian bonds.

“Logically speaking, should our govvies (government bonds) be removed from WGBI, there could be some form of portfolio rebalancing among the foreign investors,” he told TMR.

According to Kenanga Investment Bank Bhd, foreign investors turned net sellers of Malaysia’s debt securities in August as total foreign holdings dipped marginally to RM188.2 billion from RM188.3 billion in July, reversing the inflow noted in the previous two months.

The equity market, meanwhile, registered its largest outflow in 14 months at RM2.8 billion.

Total capital outflow stood at RM4.1 billion versus RM28.1 billion over the same period last year, according to the research firm’s latest report.

As part of the recent changes to Malaysia’s FEA policy, non-resident treasury centres can hedge on behalf of their related entities upon a one-time registration with BNM, while non- residents can hedge on an anticipatory basis.

Resident treasury centres in Malaysia can hedge on behalf of their related entities via a licensed onshore bank and residents can hedge their foreign currency current account obligations up to their underlying tenure.