Building Bonds


Economic News

22 Jul 2010
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As the recovery of the Malaysian economy gathers momentum, so too the country's bond market is expected to heat up as the private sector looks to capitalise on the resurgence.

With a heightened sense of risk aversion brought on by the global financial crisis, Malaysia's bond market had a slow 2009, with much of the action concentrated on secure sovereign instruments. Last year, approximately $18bn worth of private debt securities were issued, though only some $6.25bn of this was fresh issuance, 31.8% down on the previous year, according to a report by RAM Rating Services released in February.

Now the situation is different, according to Liza Mohd Noor, RAM's chief executive officer, with the time ripe for companies to dabble in the bond market, either to raise new funding, refinance older debt or build financial strength for acquisitions.

Looked at from a wider perspective, the outlook on the Malaysian bond market hinges on the ongoing roll out of the various stimulus packages and allocations under Budget 2010, which will necessitate further funding, Liza said in a statement issued in early February.

"We also expect government-related infrastructure projects and banks' capital-raising efforts to account for the bulk of the debt capital market's activity this year," she added.

While the state is expected to release more bond issues this year, they may not be at the same level as in 2009. After having auctioned $11bn of debt last year, the government is expected to rein in its use of the bond market to some degree, as it seeks to take stock of the economy and the impact of its $20.1bn stimulus programme. The government also wants to reduce its fiscal deficit, which hit 7.4% of GDP in 2009, aiming for a target of 5.6% this year.

Though the government still intends to continue its economic pump priming, it hopes that at least some of the cost of funding the recovery will be met by increased revenues, accruing from higher levels of economic activity in the private sector.

However, while Malaysia's bond market is expected to perform well this year, some instruments are tipped to do better than others. In particular, bonds with a mid-range date of maturity could be a solid investment, according to Ray Choy, head of debt market research at the RHB Research Institute. With yields on long-term bonds more sensitive to inflation and shorter-term securities susceptible to higher interest rates, Malaysia's five-year bonds could outperform both, he said in an interview with the Bloomberg news agency March 1.

"The notes are cheap in view of the smaller supply of this maturity this year," said Choy. "It's an ideal duration for hedging against rate hikes and inflation pressures. We expect the bonds to rally."

And the question of rate hikes is being asked of late, with Bank Negara Malaysia starting to send out signals that the days of record-low interest rate are gradually coming to an end. Having previously suggested that it would not be looking to lift its key rates until the second half of 2010, in the hope that lower interest levels would help fuel economic recovery, Bank Negara officials have recently announced a shift in thinking, spurred by the faster-than-expected rebound. In January, the bank warned there was a risk of financial imbalances emerging in the economy if borrowing costs remained too low for an extended period.

In late February, Bank Negara governor Zeti Akhtar Aziz went further, saying it would soon be time for interest rates to be normalised and that the extraordinary circumstances requiring low rates "no longer prevail".

At the beginning of March, yields on Malaysian bonds eased off to one-year highs, the slight dip seen as a response to stronger suggestions the reserve would hike rates, including its overnight policy rate, which currently stands at 2%. Though higher interest rates could slow bond activity, these fears have been muted.

Indeed, the potential for interest rates rises could spur the bond market, with issuers looking to speed up their efforts to raise capital before the cost of borrowing becomes more expensive, says Lum Choong Kuan, the senior vice-president and head of fixed income research at CIMB Investment Bank.

"Demand will depend on the ultimate pricing of these bonds given that investors would have better risk appetite as the economy improves," Lum said on February 4.

Wan Murezani Wan Mohamad, the head of fixed income research at MARC, is also playing down any concerns.

"The rate hike, if it happens at all, is likely to come in gradually, and the common quantum we have seen historically is around 25 basis points per announcement," he said in an interview with local press in early February.

Predictions for economic growth in Malaysia range from a low end of around 3.6% to an upper ceiling of 4.9%, with many analysts favouring the optimistic forecast. To help fund this expansion, the corporate sector is expected to make greater use of the bond market, especially while the window to take advantage of lower borrowing costs remains ajar.

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