Foreign buying of govt bonds held up in December despite Fitch downgrade

Year-end portfolio rebalancing activities helped lift overseas investors’ interest in Malaysian assets, says research firm


FOREIGN-BUYING interest in Malaysian debt securities continued to be resilient in December despite the downgrade of Malaysia’s sovereign rating by Fitch Ratings Inc.

UOB Global Economics and Market Research noted that year-end portfolio rebalancing activities helped lift overseas investors’ interest in Malaysian assets.

“Foreign portfolio inflows amounted to RM3 billion in December 2020, with debt securities attracting a net inflow of RM3.6 billion, while equities outflows narrowed to the smallest amount in 11 months at RM600 million. Foreign holdings of equities fell to 20.7% at the end of December,” it said in a note yesterday.

December’s debt inflows were predominantly driven by Malaysian government securities (MGS) and government investment issues (GIIs). For 2020, Malaysia reversed course and posted a total foreign portfolio outflows of RM6.3 billion, from a net inflow of RM8.7 billion in 2019.

This was solely due to foreign equity outflows for the third straight year, which fully offset the foreign inflows into debt markets.

UOB said foreign holdings of Malaysian bonds (MGS and GII) hit over a four-year high of RM202.1 billion at the end of 2020 compared to RM185 billion in 2019, equivalent to 24.2% of total outstanding.

“For MGS alone, foreign holdings amounted to RM177.3 billion or 40.6% of total MGS outstanding, while for GII, overseas investors held an outstanding amount of RM24.8 billion or 6.6% of total GII outstanding,” it said.

On the back of further debt inflows, foreign direct investment and sustained current account surplus, Bank Negara Malaysia’s (BNM) foreign reserves posted the largest monthly increase since March 2018 by US$2.3 billion (RM9.29 billion) to US$107.6 billion at the end of December 2020.

It also marked the highest foreign reserves level since May 2018, which is sufficient to finance 8.6 months of retained imports and is 1.2 times total short-term external debt.

BNM’s net short position in foreign-exchange swaps narrowed for seventh straight month to US$6.4 billion at the end of November 2020, the lowest level in four years.

It also stated that the continuation of foreign capital inflows and current account surplus lifted BNM’s foreign reserves to a multi-year high of US$107.6 billion at the end of December, while the ringgit ended 2020 firmer by 2% against the US dollar to RM4.02.

“We expect the ringgit to appreciate alongside other Asian currencies against broad dollar weakness. However, domestic uncertainties may weigh on the pace in the near term.

“Malaysia is expected to announce more stringent Covid-19 containment measures as new daily infections rose to record highs. Meanwhile,domestic political developments continue to linger. We reiterate our dollar/ringgit forecast of RM4.00 by the end of the second quarter of 2021 (2Q21) and RM3.95 by 4Q21,” it added.