RM70b outflow seen as ringgit continues to weaken

Malaysia could be in recession if the outflow reaches 20 per cent of GDP, a remote possibility at this juncture.

KUALA LUMPUR: The speculation in the market is that another RM70 billion can be expected to flow out of the country given the weakening ringgit vis-à-vis the USD. This is mainly due to foreign investors winding down their positions in the bond market.

The same phenomenon occurred during the last two financial crises in 1998 and 2008. Foreign investors, at end September, were believed to be holding at least RM140bil worth of Malaysian Government Securities (MGS). The Malaysian bond market is the second largest in Asia after South Korea, excluding Japan.

The RM70bil equals about 7% of the country’s gross domestic product (GDP).

Malaysia could be in recession if the outflow reaches 20 per cent of GDP, a remote possibility at this juncture, according to economists.

“In the previous two financial crises, the level of foreign holdings of Malaysian Government Securities (MGS) was halved in a matter of months,” said an economist with a local research firm, in a media update in a local English daily.

“Based on the ringgit depreciation and rising yields on the bond market, it seems that quite a bit of money had flown out.”

It’s a vicious cycle that feeds on itself.

The ringgit has been under pressure since August Brent crude oil closed below US$100 a barrel. Oil is now at US$60 a barrel and still falling, ready to test the next psychological barrier at US$50.

The weakening ringgit encourages sell-offs which results in falling bond prices which in turn results in a further weakening of the local currency. Ten-year MGS yields was at a 10-month high of 4.232 per cent on Friday, a significant 40-basis-point drop within a month.

“It is an indication of a huge sell-off in the market,” said Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias in the media update. “Other markets too have been hit hard in the latest round of foreign sell-off.”

Hanifah Hashim, Franklin Templeton Investments’ executive director and head of Malaysia fixed income and sukuk, thinks that “the impact of weakening oil prices affected the local currency and resulted in the rise of 10-year MGS bond yields”.

AllianceDBS Research, in a recent report, said that Malaysia had RM139.9bil in portfolio net inflow since the 2008-09 global financial crisis, mostly in MGS.