Malaysia now the 'SICK MAN' of SE Asia: Oil price slump, low yields & weak ringgit may trigger capital flight

Malaysia has emerged as Southeast Asia's weakest spot because of the current slide in global crude oil prices and rising US Treasury yields that weaken the ringgit against the US dollar, said an international sovereign credit consultant.

Writing in his Macroscope column in Hong Kong daily South China Morning Post, Nicholas Spiro said the net oil exporter was also more sensitive to increases in US Treasury yields as it has one of the largest shares of foreign holdings of local currency bonds in emerging markets (EMs).

He noted that emerging Asia had proved relatively resilient to the deterioration in sentiment, partly because investors had been much more bullish on the region compared with emerging Europe and Latin America and also as Asia’s main economies were all net oil importers and benefited from falling oil prices.

"Yet one country in the region sticks out like a sore thumb in terms of its vulnerability: Malaysia," he said in the newspaper column.

The managing director of London-based niche consultancy firm Spiro Sovereign Strategy, specialising  in European sovereign credit, said Malaysia's stocks have dropped "a whopping" 12% in the past three months, describing it as "one of the steepest declines" among major EMs, while its Indonesian and Thai  equities counterparts have fallen just 0.8% and 2.5% respectively for the same period.

Similarly, the ringgit has plunged nearly 11% against the US dollar since the end of August to a five-year low, while Indonesian rupiah, Thai baht, the Philippines peso only fallen 5.3%, 3% and 2% respectively.

Malaysia's central bank, Bank Negara, quoted the ringgit at RM3.49 to the US dollar and RM2.66 to the Singapore dollar today.

Despite yields on Malaysia's 10-year local currency bonds have risen modestly since oil prices began to fall sharply in October, Spiro said foreign inflows into the country's government debt market have turned to outflows.

He said Malaysia's bonds remained unattractive because of its low yields and citing data from Bank of America Merrill Lynch, which tracks foreign holdings of EM domestic debt, Malaysia’s local bond market suffered outflows of US$900 million in October.

In contrast, the Indonesian and Indian bond markets enjoyed a US$1 billion and US$600 million of inflows respectively, partly due to higher yields and "enthusiasm generated by the election of reform-minded leaders in both countries".

"Indeed, both the Indian and Indonesian governments have been able to take advantage of the fall in oil prices to undertake much-needed fiscal reforms.

"Malaysia, on the other hand, is experiencing an oil-driven deterioration in its fiscal and current account balances."

Noting that about one third of Malaysia's revenues come from oil and gas exports, Spiro said the country's public finances were coming under severe strain and as such, the credibility of the government's fiscal policy now was dependent on the coming goods and services tax (GST) to be implemented in April 2015.

He also warned that plunging oil prices would significantly worsen Malaysia's balance of payments position, noting that its current account surplus had already "declined dramatically" in October, saying he expected it to shrink more if the oil prices kept tumbling.

Spiro also expressed concerns over the "extremely high" foreign ownership of Malaysia's domestic debt market, as markets were volatile and the US Federal Reserve was likely to start increasing interest rates in the middle of next year.

He said despite recent outflows from the country's bond market, foreign holdings still accounted for 45% of the market, which was higher than countries such as Indonesia which has 38% share, Thailand (18%), Brazil (20%) and Turkey (26%).

The small silver lining, said Spiro, was Malaysia's local institutional investors such as government-controlled pension funds, which could be relied on to pick up the slack when "flightier" foreign investors reduced their holdings during periods of financial stress.

"Indeed, the development of a domestic institutional investor base in EM bond markets – particularly Asian ones – continues to provide a solid underpinning for the EM asset class as a whole.

"Yet this does little to help counter the slide in oil prices, which is Malaysia’s prime concern right now," he added. - TMI