KUALA LUMPUR: Investor sentiment towards Malaysia has in general improved as oil prices stabilised and the government pledged it would consolidate public finances, notes Pine Bridge Investments in an update quoted by Bloomberg News.
Still, investors remain concerned about political risks as former Premier Mahathir Mohamad steps up his campaign to oust Prime Minister Najib Abdul Razak from power, said Bloomberg in an op-ed. “Bloomberg modeling shows that credit default swaps (CDS) still cost about 70 basis points more than would be warranted by economic fundamentals.”
Vincent Tsui, a Hong Kong-based economist at global asset-management firm Alliance Bernstein LP, which oversees USD460 billion, sees the recent tightening of Malaysia’s CDS spread as mainly due to the rebound in oil prices from the trough in January. “I think the 1MDB development isn’t the key market focus for now, although the liquidation of some of the assets alleviates some of the market concerns.”
Omar Slim, a Singapore-based vice president of fixed income at the company, which oversees USD84.5 billion globally, expects Malaysia’s bonds to remain relatively resilient in the medium to long term, assuming no major economic or political changes take place.
“The outlook depends on external drivers, such as oil prices, sentiment around emerging markets and some Malaysia-specific factors,” said Slim. “It is important that the political noise out of Malaysia subsides and for investors to continue to have trust in the strength and integrity of Malaysia’s institutional framework.”
Investors are also waiting to see who replaces Zeti Akhtar Aziz as Bank Negara Governor when her term ends on April 30. Najib hasn’t given any indication who will be the new central bank chief despite speculation in the media. Zeti kept the benchmark interest rate on hold since July 2014 and succeeded this year in restoring currency reserves.
Briefly, according to Bloomberg, the oil rally lifted the ringgit from its weakest level in 17 years and increased foreign exchange reserves towards the USD100 billion mark which was breached in July last year for the first time since 2010. The ringgit also kept rising the last two weeks, despite a drop in Brent crude prices, as 1Malaysia Development Berhad (1MDB) which is the subject of global probes, said that it plans to have no short-term debts and bank borrowings within weeks after selling its energy assets.
“I wasn’t too worried about the negative headlines or the price action because there’s very strong underlying state support for the bonds,” said Luc D’Hooge, head of emerging-market bonds at Vontobel Asset Management in Zurich, which holds 1MDB’s notes due 2023. “The quality of the company is something else of course.”
The movement in the ringgit has largely been tracked by default swaps as Malaysia, being Asia’s only net oil exporter, is vulnerable to Brent crude oil prices. The default swaps rose to 247, the highest in six years, as the ringgit reached its low. The ringgit posted a 9.5 per cent advance this quarter, the biggest in Asia. It was also the steepest climb for the currency since the first quarter of 1973. The ringgit was at RM4.48 to USD1 last September, the weakest since the Asian Currency Crisis in 1997/98.
“It’s too early to call a positive trajectory in Malaysia’s fundamental creditworthiness,” said Andrew Colquhoun, the head of Asia Pacific sovereigns at Fitch Ratings in Hong Kong, in an e-mail interview on March 29. “In particular, tensions still seem to be building up in the political arena.”
“This kind of thing can make investors nervous. Global investor risk appetite could also weaken again.”