Malaysia Risk Tops Philippines on Najib Budget Gap
Malaysia’s default risk climbed above that of the Philippines for the first time as Prime Minister Najib Razak seeks to avoid a debt-rating cut, while his counterpart pitches for upgrades.
Contracts insuring Malaysian bonds against non-payment rose 63 basis points this year to 141, compared with an advance of 33 to 139 for its lower-rated neighbor, according to data provider CMA. Malaysia’s 10-year ringgit yield jumped 44 basis points to 3.92 percent, 16 basis points higher than the rate on similar-maturity Philippine notes, data compiled by Bloomberg show.
Najib announced fuel price increases on Sept. 2 for the first time since 2010 to curb subsidies that have strained the budget, after Fitch Ratings cut its outlook on the nation’s A-rating to negative from stable on July 30. Philippine President Benigno Aquino is the only contender in Southeast Asia for an upgrade as Moody’s Investors Service placed its Ba1 ranking on review July 25, signaling an increase to investment grade.
“Malaysia’s creditworthiness is deteriorating and the country needs to address its fiscal and structural problems,” Nicholas Spiro, London-based managing director of Spiro Sovereign Strategy and a former consultant at Medley Global Advisors LLC, said in a Sept. 3 interview. “The Philippines is a lower investment-grade credit whose strengths have become more apparent.”
The premium investors pay on Malaysia five-year credit-default swaps over those of the Philippines reached 10 basis points on Aug. 23, the most in CMA data going back to 2004. The cost was lower as recently as three weeks ago. The Philippines won investment-grade status this year from Fitch and Standard & Poor’s after cutting its budget deficit.
Malaysian government notes handed investors a 0.3 percent return in 2013, compared with 7 percent for the Philippines, the best performance among Southeast Asia’s five-biggest economies, according to indexes compiled by HSBC Holdings Plc.
Najib is facing rising debt levels as he seeks to attain developed-nation status by 2020, in addition to slowing economic growth and a shrinking current-account surplus. Fitch cited the country’s indebtedness and lack of budgetary reform for the rating outlook cut in July, saying Malaysia risks a downgrade in 18 months to 24 months unless it improves the fiscal position.
The prime minister is aiming to lower the budget deficit relative to gross domestic product to 4 percent in 2013, double President Aquino’s goal, while Malaysia’s debt-to-GDP ratio is 53.3 percent, compared with 51.5 percent in the Philippines.
“I am more bullish on the Philippines,” Sacha Tihanyi, a Scotiabank strategist in Hong Kong, said in a Sept. 4 interview. “The ratings agencies have been sending warning messages implying that without fiscal consolidation, Malaysia may be on the road to a ratings downgrade.”
Najib seems to be heeding those warnings with his decision to raise fuel prices, which drew a positive response from bond investors. The yield on Malaysia’s 3.48 percent ringgit-denominated notes maturing March 2023 fell 12 basis points, or 0.12 percentage point, to 3.97 percent this week, according to data compiled by Bloomberg.
He announced plans on Sept. 2 to bolster the nation’s finances that included a delay in some state-building projects that have high import contents in an effort to stem the current-account shrinkage. Strengthening the fiscal deficit position is vital to sustaining the economy’s resilience and enhancing public and investor confidence, he said, helping halt a selloff in 10-year debt over the past two weeks.
An improvement in fiscal balances should drive the 10-year yield lower, Morgan Stanley said in a Sept. 3 report written by a team led by Rashique Rahman, co-head of global emerging-currency strategy in New York. The bank recommends clients bet on a narrowing gap between two- and 10-year yields.
The spread widened 29 basis points this quarter to 70 basis points, compared with a narrowing of 42 to 63 for the Philippines, according to data compiled by Bloomberg.
“Fiscal worries about Malaysia are a bit overblown,” Saktiandi Supaat, the Singapore-based head of foreign-exchange research at Malayan Banking Bhd. (MAY), the nation’s largest lender, said in a Sept. 3 interview. Still, he added, “Najib needs to really do something on fiscal reforms in addition to what he’s done Sept. 2.”
The leaders of Malaysia and the Philippines are both having to contend with capital outflows from emerging-markets amid signals from the Federal Reserve that it may pare monetary stimulus, sending many Asian currencies lower.
Malaysia’s ringgit weakened 4.8 percent this quarter, more than the 3.1 percent loss in the Philippine peso, data compiled by Bloomberg show. Indonesia’s rupiah dropped 11.2 percent, the Thai baht 4.2 percent and Singapore’s dollar 1 percent.
International investors have pulled about $44 billion from emerging-market stock and bond funds since the end of May, EPFR Global, the Cambridge, Massachusetts-based research company, reported Aug. 23.
Malaysia is more vulnerable to capital outflows than some of its regional peers, partly due to its high reliance on foreign ownership of debt and the deterioration in the current account, according to Credit Suisse Group AG. The ringgit faces the most pressure among Asian currencies after the Indian rupee and Indonesia’s rupiah, Santitarn Sathirathai, Singapore-based economist at Credit Suisse, wrote in a research note Aug. 20.
Global funds held 28 percent of Malaysian government securities at the end of July, central bank data show. That compared with August readings in Indonesia and Thailand of 31 percent and 7.8 percent, respectively. Similar figures for the Philippines aren’t available.
Foreigners cut holdings of Malaysia’s sovereign and corporate bonds by 13 billion ringgit ($3.9 billion) in July, the most since September 2011, to 215.9 billion ringgit, according to the latest central bank data.
Malaysia’s budget deficit is likely to be higher than the official forecast of 4 percent in 2013 even after the cut in fuel subsidies, according to Moody’s. Without additional reforms, the government’s fiscal targets are “increasingly out of reach,” analysts Christian de Guzman and Bart Oosterveld wrote in an e-mailed report on Sept. 4.
Investors were selling “weaker fundamental” countries like India and Indonesia and now that’s spreading to Malaysia and Thailand, Wee-Ming Ting, the Singapore-based head of Asian fixed income at Pictet Asset Management, which oversees $24.3 billion in emerging-market bonds globally, said in a Sept. 4 interview.
“That’s why we see suddenly the underperformance in Malaysian assets in the CDS,” Ting said. “The reduction in the subsidy is the right direction overall.”