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Malaysia, Indonesia bonds to outpace peers on growth boost

RETURNS from Indonesian and Malaysian bonds may continue to outpace regional peers on the back of higher economic growth and lower price pressures in those countries as stagflation risk looms globally.  

Indonesia bonds have outperformed South-East Asian (SEA) peers so far this year, losing just 2.9%, while an index of US Treasuries tumbled by nearly 9% over the same period. Total losses of 6.5% from Malaysian debt have been better than those on Thai and Philippine bonds, which have set investors back by at least 10%.

Natwest Group Plc is among those betting that being in an economic sweet spot will lure global emerging-market investors to these markets. Indonesia and Malaysia’s second-quarter GDP rose by 5.4% and 8.9% respectively, from the year before, topping estimates compared to Philippine and Thai growth that missed forecasts.

“If developed markets see stagflation risk becoming more entrenched, we may see increased allocations toward economies with good fundamentals instead,” said Galvin Chia, an EM currency strategist at Natwest Markets in Singapore. “Growth leaders in SEA such as Indonesia and Malaysia could benefit.”

In emerging-markets, better growth is good for bonds as improving macro-economic conditions will lure in global investors. Shorter yields, which are more sensitive to domestic rate expectations, have jumped in the Philippines and Thailand relative to a smaller uptick in Indonesia and Malaysia.

Malaysia’s headline inflation is only 0.4% above a long-term average of 3%, while in Indonesia, it’s at 4.9%, higher than the central bank’s 2%-4% target. Malaysia releases July inflation figures on Aug 26.

Meanwhile, Thailand and the Philippines are seeing surging price pressures, hitting 7.6% in July in the former, near a 14-year high and considerably above the central bank’s target range of 1%-3%.

Part of the reason behind more muted inflation in Indonesia and Malaysia are the government’s fuel subsidies. Nonetheless, both nations have managed to keep their fiscal deficits in check, mainly due to the windfall from commodity exports.

Malaysia is forecast to meet its fiscal deficit target of 6% of GDP this year. At the same time, Indonesia announced this week that it is targeting a 2023 fiscal gap of 2.85% of GDP, back below the 3% target abandoned during the Covid-19 crisis. — Bloomberg / pic HUSSIEN SHAHARUDDIN

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