Little foreign interest in Malaysia's 30-year bonds

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 Sept 27 this year. 

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 the 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 first Supplementary Bill 2013 for operating expenditure worth RM15 billion could push this year’s budget deficit-to-GDP ratio to 5.5 percent, way above the initial 4 percent target set in Budget 2013 assuming no change to forecasts for revenue, development expenditure, loan recovery and GDP.

Malaysia’s current account surplus narrowed dangerously to RM2.55 billion in the Q2 2013, 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 percent by year-end from 53.5 percent as at the end of last year, leaving it among the highest in Southeast Asia (versus 51.5 percent in the Philippines, 44.5 percent in Thailand and 23 percent 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. 

In addition, three factors may have also caused foreign investors to shy away from subscribing to these long maturity bonds to avoid currency and interest rate risks: 

(i) Anxiety over the 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 percent year-on-year 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, 

Address concerns

Notwithstanding the consolation from the bond over-subscription 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 percent down from 46.8 percent in June 2013 or 49.5 percent in May 2013, according to Bank Negara.
 
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 - Southeast Asia’s largest bond market - Institut Rakyat is less certain whether they could turn out to be a good fund-raising 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 percent 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 percent and significantly higher than those of similar Thai bonds at 4.6 percent.

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. 

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.

This is 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 concerns, which are valid for both foreign and domestic investors, or at least demonstrate assuring signs of taking steps in the right direction.

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AZRUL AZWAR is executive director of Institut Rakyat.