Institut Rakyat views with great concern various insider reports suggesting the virtual absence of foreign investors in Malaysia’s inaugural issuance of 30-year sovereign bonds on Friday, 27 September 2013. This could set off alarm bells due to worries within the investment community over the health of Malaysia’s public finances and further deterioration of Malaysia’s current account balance, raising the spectre of twin deficits. Historically, Malaysia’s sovereign debt issues, which are in the investment grade league of A- or A3 have never failed to draw significantly high levels of foreign interest.
Indeed, the recently tabled 1st Supplementary Bill 2013 for operating expenditure worth RM15 billion could push this year’s budget deficit-to-GDP ratio to 5.5%, way above the initial 4% target set in Budget 2013 assuming no change to forecasts for revenue, development expenditure, loan recovery and GDP, while Malaysia’s current account surplus narrowed dangerously to RM2.55 billion in the 2Q2013, compared to the quarterly average of RM23.93 billion between 2005 and 2012. Institut Rakyat also estimates that the public debt-to-GDP ratio may breach the self-imposed ceiling of 55% by year-end from 53.5% as at end-2012, leaving it among the highest in South East Asia (versus 51.5% in the Philippines, 44.5% in Thailand and 23% in Indonesia) due to the additional expenditure for 2013. Little wonder that Malaysia’s public debt burden is among the highest in the region – its local currency denominated government debt outstanding stood at US$145 billion versus Thailand’s US$104 billion, Indonesia’s US$89 billion and Vietnam’s US$26 billion as at end-June 2013, according to the Asian Development Bank (ADB).
In addition: (i) anxiety over Federal Reserve’s looming “tapering” of its bond-purchasing programme or a scale-back of its quantitative easing policy since late May 2013 and hence, prospects of tightening global monetary policy including for Malaysia; (ii) moderating growth momentum with GDP growth averaging at only 4.2% YoY in the first half of 2013; and, (iii) persistent capital outflows and hence, substantial Ringgit weakening in recent months, in particular following revision to Malaysia’s sovereign credit rating outlook to negative from stable by Fitch in late July 2013 and increased financial volatility, may have also caused foreign investors to shy away from subscribing to these long maturity bonds to avoid currency and interest rate risks.
Notwithstanding the consolation from the bond oversubscription rate of 2.44 times, the fact remains that only domestic institutional investors such as pension funds and insurance companies were keen. These are likely to hold the long-tenured bonds to maturity as part of their asset-liability management and not necessarily an indication of the bond quality. As at end-July 2013, foreign ownership of Malaysian government bonds stood at 40% down from 46.8% in June 2013 or 49.5% in May 2013, according to Bank Negara Malaysia.
While these long-term bonds are the most appropriate to prevent maturity mismatch and viable for infrastructure projects of long gestation period while extending the yield curve and adding more depth to the Ringgit-denominated bond market, South East Asia’s largest bond market, Institut Rakyat is less certain whether they could turn out to be a good fundraising or project financing benchmark for corporations given the quasi-indifference among foreign investors towards these historic issues. As a result, while these sovereign bonds will mature by September 2043, priced to yield 4.935% at only 123.5 basis points above comparable US Treasuries, final yields come in at the higher end of the indicative range of 4.35%-4.75% and significantly higher than those of similar Thai bonds at 4.6%.
With the longest ever maturity of any kind of Malaysian debt offering, the RM2.5 billion proceeds from these bonds will be used to finance Malaysia’s US$444 billion infrastructure development programme under the Economic Transformation Programme (ETP). Although most Asian governments and corporations, including in Malaysia, may have missed the opportunity to raise funds more cheaply for their infrastructure spending in the immediate-to-medium term, their vulnerability to forex gyrations, sudden spike in borrowing costs and shifts in investor risk appetite is much reduced today thanks to the rapid expansion of the local currency bond market and the maturity lengthening of bonds, both of which have helped address currency and tenure mismatch issues as well as improve the systemic soundness, stability and resilience.
Nonetheless, the foreign non-participation in such a momentous and eventful debt issuance could be a harbinger of further loss of interest among investors in Malaysia’s growth story should we fail to promptly address their valid concerns, which are valid for both foreign and domestic investors, or at least demonstrate assuring signs of taking steps in the right direction.
****** Article by Azrul Azwar Executive Director INSTITUT RAKYAT
