Early polls talk may fuel ringgit bond outflows as jitters rise

Talk is growing that Malaysia is gearing up for an early general election, and for global bond funds, that may be the cue to head for the exit.

The Southeast Asian nation may go to the polls as early as November after the authorities brought forward the federal budget by three weeks to Oct. 7, according to analysts. An election may usher in a fourth change in government in as many years and another potential revision to fiscal policies.

Money managers who bet on Malaysian bonds this year have been saddled with a 12% loss as interest rates climbed, and the growing political risks may exacerbate the declines. Foreigners pulling out more money may make it harder for the government to fund a budget deficit that’s expected to reach 6% of gross domestic product this year, with year-to-date net outflows standing at US$76 million.

“An early tabling of budget gives the incumbent party the optionality to hold the election as early as November, to take advantage of the feel-good effect post-budget announcement,” said Winson Phoon, head of fixed-income research at Maybank Securities Pte. in Singapore. “It will also avoid the risk of a deterioration in grassroots sentiment if a global economic downturn comes in 2023.”

History shows that global funds have tended to sell ringgit debt each time an election approached.

On average, overseas investors pulled US$940 million a month from Malaysian government bonds during the three months after parliament was dissolved in April 2013 and April 2018 and following the change in administration in February 2020.

The three-month change in outflows from Malaysian bonds relative to the 12-month average was more sizable compared to a similar gauge for its emerging Asia peers which provide foreign bond flow data, such as Indonesia, India, Thailand and South Korea.

Growing Pressure

Elections aren’t due until September 2023 but Prime Minister Ismail Sabri Yaakob is under pressure from factions within his United Malays National Organisation party to hold polls sooner rather than later. Some in the cabinet have argued against an early election, with Health Minister Khairy Jamaluddin saying it would be highly risky to hold a vote during the year-end monsoon season.

As the election draws nearer, the focus will be on Malaysia’s fiscal policy, especially the size of the budget deficit. Maybank Investment Bank expects the shortfall to narrow to 5% of GDP next year, while economists at Citigroup Inc. and CIMB Bank Bhd. predict a gap of 5.2% and 4.6%, respectively.

As the deficit shrinks and a larger amount of bonds fall due next year, net government debt supply is likely to decline, according to Maybank Securities’ Phoon.

Here is a Bloomberg analysis of foreign fund flows into Malaysian bonds for the period covering two general elections and the change in administration in 2020. The figures are compared with bond flows for other Asian economies, which have provided the data over the past decade. – BLOOMBERG