Malaysia’s High Real Yields Mean Inflows Beat PeersLiau Y-Sing and Elffie Chew
Global funds pumped more cash into Malaysia’s sovereign debt than Indonesian or Thai bonds for a fourth year in 2012, lured by the highest real yields and the safest credit rating of the region’s three-biggest economies.
Foreign ownership of the local-currency notes rose by $8.4 billion in the first 11 months, compared with a full-year increase of $4.9 billion in Indonesia and $6.6 billion in Thailand, according to official figures. Malaysia is rated A3 by Moody’s Investors Service, three levels above Indonesia and one step more than Thailand, while its 10-year bonds pay 2.3 percent after accounting for inflation, versus 0.9 percent and 0.1 percent for its respective peers.
Bond-trading volumes in Malaysia that are 21 percent higher than in Indonesia and more than twice those in Thailand make the market more liquid, meaning it’s easier to match buyers and sellers, according to Natixis Asia Ltd. and CIMB Group Holdings Bhd. Malaysia has the lowest inflation in Southeast Asia even as the central bank kept borrowing costs on hold since May 2011.
“Malaysia has more sound economic fundamentals,” Jackit Wong, a regional economist at Natixis Asia in Hong Kong, said in a Jan. 23 e-mail. “Malaysia has a higher sovereign rating and a relatively deep bond market, which provides some comfort to overseas funds, particularly pension funds and insurers.”
Trading of government securities totaled $283 billion in Malaysia last year, stock exchange data show. In Indonesia, volumes amounted to $233 billion and in Thailand $101 billion, according to data posted on the websites of the finance ministry and Thai Bond Market Association.
Malaysia exempts foreign investors from paying income tax on bond earnings to boost investment in the $289 billion economy, Southeast Asia’s third largest. Thailand imposed a 15 percent levy in 2010 to stem gains in the baht, while Indonesia, the biggest of the three in terms of gross domestic product, introduced a similar tax of 20 percent in 2009.
Overseas investors held $42 billion of ringgit-denominated government bonds as of November 2012, central bank data show. That compares with $17 billion of baht securities in December and $28 billion in rupiah notes as of Jan. 21, according to data from the Bank of Thailand and Indonesia’s finance ministry.
Malaysia’s worsening fiscal deficit and high household debt, if not addressed, may add downside risk to the sovereign credit rating, said Wong.
The National Front coalition, which has governed Malaysia since independence from the British in 1957, faces national elections this year after making cash handouts to low-income families to gather support. Prime Minister Najib Razak must dissolve parliament by April 28 and is aiming to restore a two-thirds majority ceded in 2008.
The finance ministry has posted a fiscal deficit since 1998, with the shortfall amounting to 42.5 billion ringgit in 2011, or 4.8 percent of gross domestic product. The government estimates that figure narrowed to 4.5 percent of GDP in 2012.
Thailand’s relative political instability has dissuaded some investors, according to Guan Yi Low, a Singapore-based fixed-income investment director at Eastspring Investments.
Prime Minister Yingluck Shinawatra took office in August 2011, after she defeated her predecessor Abhisit Vejjajiva in elections. The former premier and his deputy are being charged with murder for their role in quelling political protests that claimed more than 90 lives in 2010. Yingluck’s brother, Thaksin Shinawatra, was ousted in a 2006 coup and lives abroad after fleeing a 2008 jail sentence.
The challenges faced by Thailand in terms of competitiveness “remain considerable,” with government instability one of the biggest problems for businesses, along with bureaucracy and security concerns, the World Economic Forum said in its Global Competitiveness Report 2012-2013.
“Malaysia attracts more inflows as both the bond and currency markets are perceived to be more stable than Thailand and Indonesia,” Eastspring’s Low, who helps oversee about $90.5 billion at the Asian unit of the U.K.’s Prudential Plc, said in a Jan. 22 e-mail. Global funds also prefer Malaysia as the country doesn’t tax foreigners for income earned on debt investment, she said.
The ringgit has appreciated 2.8 percent against the dollar over the past six months, compared with a 5.6 percent advance in the Thai baht, according to data compiled by Bloomberg. Indonesia’s rupiah declined 3.2 percent.
Malaysia’s currency may gain 2.8 percent from today’s level of 3.0735 per dollar in 2013, compared with 0.2 percent in the baht and 1.5 percent for the rupiah, the median estimates of analysts in Bloomberg News surveys show.
Indonesia recorded its second straight trade deficit of $478 million in November, following a record gap of $1.9 billion in October, government data showed, reducing the amount of dollars available onshore.
The lack of U.S. currency may deter overseas investors from the country’s bonds, according to a Jan. 10 research note from HSBC Holdings Plc. The shortage can affect the ability of investors to move in and out of the nation’s currency and securities, Eastspring’s Low said.
Indonesia’s central bank said it sold dollars yesterday to boost supply of the greenback and improve investor confidence.
Bank Indonesia stepped up intervention to help narrow the gap between the onshore and offshore exchange rates, Hendar, executive director for monetary policy at the central bank, said in an interview.
Malaysia’s 10-year government bonds yield 3.48 percent, without adjusting for inflation of 1.2 percent, according to data compiled by Bloomberg. Similar-maturity debt in Thailand pays the equivalent of 3.7 percent, while Indonesian securities offer 5.21 percent. Inflation in Thailand is 3.6 percent, compared with 4.3 percent in Indonesia.
“If you are looking for something that is relatively safe on the downside, you might want to look at the ringgit currency and ringgit bonds,” Lee Kok Kwan, Kuala Lumpur-based deputy chief executive officer of CIMB Group Holdings, said in a Jan. 23 interview. “The interest differential is positive in Malaysia’s favor.”
Malaysia is an attractive destination for bond investors given that the government’s $444 billion development program to build railways, roads and power plants will boost economic growth, shoring up domestic consumption, said Wong at Natixis Asia. The Southeast Asian nation is running a surplus in the current account, the broadest measure of trade, which is also supportive, she said.
Malaysia had a current-account surplus of 10.8 percent of gross domestic product in 2012, according to an estimate from the International Monetary Fund. Indonesia’s current-account deficit was 0.4 percent of GDP, while Thailand’s was a 1 percent surplus, the Washington-based institution predicts.
Gross domestic product in Malaysia will increase 4.5 percent to 5.5 percent this year, compared with the 5 percent estimated for 2012, according to a government forecast in September. Indonesia’s GDP will rise 6.6 percent to 6.8 percent, Finance Minister Agus Martowardojo said Jan. 14, versus the central bank’s projection of 6.3 percent for last year. Thailand’s economy will expand 4.9 percent, compared with 5.9 percent in 2012, Bank of Thailand Assistant Governor Paiboon Kittisrikangwan said on Jan. 18.
“The main things driving interest in Malaysia is a liquid and well-developed currency and fixed-income markets, strong economic fundamentals and no capital controls,” said Lee at CIMB.