Malaysian bond market bullish amid low interest rates

BNM’s move to cut the OPR will translate into cheaper financing cost, which is a boon for companies seeking financing from the bond market


MALAYSIAN Government Securities (MGS) yields in 2020 will be lower than as at end-2019 due to loose monetary policies adopted by central banks globally to counter the fallout from the Covid-19 outbreak, according to Bond Pricing Agency Malaysia Sdn Bhd (BPAM).

“The Malaysian bond market will be bullish amid the current risk-off market sentiment coupled with a low interest-rate environment,” BPAM CEO Meor Amri Meor Ayob told The Malaysian Reserve (TMR) in an email interview.

Bank Negara Malaysia’s (BNM) move to cut the Overnight Policy Rate (OPR) by 25 basis points (bps) to 2.5% will translate into cheaper financing cost which will be a boon for companies seeking financing from the bond market.

The F&B sector is the largest component of Malaysia’s GDP

Covid-19 is set to affect the bottom line of companies related to the hospitality industry such as hotels, food and beverages (F&B), travel, airlines, meetings, incentives, conferencing, exhibitions, theme parks, cinema, etc. “Due to the integrated nature of the production process, the Malaysian manufacturing industry will also be impacted as a result of the temporary production halt by Chinese factories,” Meor Amri added.

That said, the composition of the hospitality and manufacturing industries in the Malaysian bond market is relatively small compared to other sectors like infrastructure and finance, thus, the credit fallout from Covid-19 should be contained, he added.

The Malaysian bond and sukuk market expanded to RM1.49 trillion as at end-2019 from RM1.40 trillion the year prior despite increasing global economic headwinds, data from BPAM’s Malaysian Bond and Sukuk Almanac 2019 showed.

As a result of the ongoing US-China trade war, the ringgit bond market — as measured by the benchmark TR BPAM All Bond Index — gained 8.72% to end the year at 176.759 points against 162.580 points in 2018 due to flight-to-safety flows, as well as global interest-rate cut expectations.

In 2019, total sovereign issuance amounted to RM115.7 billion, up 2.57% from RM112.8 billion in 2018, resulting in projections for overall debt-to-GDP ratio to increase to 52.7% in 2019 from 51.2% the year before.

On balance, corporate bond and sukuk issuance in 2019 were comparable to 2018 with one notable exception, that being the RM27.55 billion unrated issuance by Urusharta Jamaah Sdn Bhd (UJSB) in May 2019.

Total corporate bond issuance last year increased by 25.3% to RM132.12 billion from RM105.45 billion in 2018.

RAM Rating Services Bhd is expecting the momentum of corporate bond issuance to remain steady this year, given the markedly more accommodative interest-rate environment.

That said, there are new downside risks to growth emerging from the Covid-19 spread which may cast some uncertainties on economic resilience and thus, financing needs going ahead.

Issuance may be lower than the rating agency’s initial forecast of RM100 billion to RM120 billion. The financial market may also experience more volatility.

MGS and government investment issues (GII) issuance are projected to amount from RM115 billion to RM125 billion in 2020, RAM Ratings told TMR.

“This takes into account the government’s deficit financing requirements and the refinancing of debts maturing next year.

“There is some upside to this forecast following the government’s recent stimulus package to tackle the impact from Covid-19, which is projected to widen the government’s fiscal deficit,” the ratings agency added. It said the Covid-19 outbreak and rapid global transmission pose new downside risks against global growth momentum, as well as Malaysia’s economic resilience.

“In particular, we expect an immediate impact on discretionary services and industries such as domestic tourism, retail and F&B. The services sector is the largest component of Malaysia’s GDP.

“Given China’s position as the epicentre of the pandemic and a central node in the global supply chain, the consequences of shrinking demand and disrupted the supply of manufacturing inputs will be felt across the globe,” it said.

Its assessment of Covid-19’s economic ramifications rests heavily on the firm’s assumptions about the duration and severity of the pandemic.

Its base case assumes six months of depressed private consumption and trade-related growth, which will shave 0.3% off GDP growth for 2020.

“Based on a more extreme scenario of prolonged disruptions to consumption and supply chains of about nine months, we expect a 0.5% reduction in GDP growth,” it added.

Gross corporate bond issuance hit a record high of RM132.8 billion last year, surpassing RAM Ratings’ projection of RM110 billion to RM120 billion.

The performance represents a marked increase over the RM105.4 billion issued in 2018, while also outperforming the previous high of RM124.9 billion posted in 2017.

Much of the increase in gross corporate bond issuance last year is attributable to the private sector (2019: RM103 billion, 2018: RM66.2 billion), largely boosted by the extraordinary issue from UJSB (RM27.6 billion).

Discounting this outlier, private sector issuance was still robust last year, accounting for RM75.5 billion of the market’s corporate bonds.

This surpasses the private sector’s average annual issuance of RM64.4 billion in the last five years.

In the government segment, MGS/GII issuance came up to RM115.7 billion last year (2018: RM114.8 billion), in line with RAM Ratings’ forecast of RM110 billion to RM120 billion.

The Malaysian bond market also enjoyed a record year in 2019 on two fronts. Due to the steady lowering of interest rates by the US Federal Reserve and global central banks including BNM, investors in Malaysia’s fixed income market scored a bumper return last year as yields had declined about 78bps between the beginning and end of 2019.

Despite significant volatility throughout the year, the debt market also enjoyed RM19.9 billion of net foreign inflows, the biggest since 2012, in contrast to a net outflow of RM21.9 billion in 2018.