Stocks Gain as Ringgit, Bonds Climb on Budget Optimism

Malaysian stocks closed at a record high and 10-year bond yields dropped the most since June on optimism Prime Minister Najib Razak will take steps to rein in spending and avoid a ratings downgrade in tomorrow’s budget.

The FTSE Bursa Malaysia KLCI index of shares rose 0.3 percent to 1,818.93 in Kuala Lumpur. The yield on the 3.48 percent bonds due in 2023 declined 11 basis points to 3.62 percent, the lowest since July 8, according to data compiled by Bloomberg. The currency appreciated 0.2 percent to 3.1608 per dollar. It reached 3.1413 on Oct. 18, the strongest since June.

“Investors have been buying Malaysian stocks because economic growth has been fairly stable and the market is expecting the budget to contain measures to further spur growth,” said Ang Kok Heng, who helps manage $428 million as chief investment officer at Phillip Capital Management Sdn. in Kuala Lumpur. “The Malaysian market has been advancing in line with global equities.”

The ringgit strengthened for a second day on speculation Najib will stand by a pledge to further cut state subsidies, broaden the tax base and possibly announce a new government services tax. Fitch Ratings reduced the outlook on Malaysia’s investment-grade rating to negative in July, citing rising debt and a lack of budgetary reform, prompting the prime minister to raise fuel prices.

Najib increased fuel prices for the first time since 2010 in September and said he’d delay some public projects. The country has run annual budget shortfalls each year starting 1998. The nation’s proportion of debt to gross domestic product of 53 percent is the highest among Southeast Asia’s biggest economies, data compiled by Bloomberg show.

Goods Tax

Malaysia will probably implement an initial 4 percent goods and services tax that will generate 20.5 billion ringgit ($6.5 billion), or as much as 14 percent of total tax revenue, in the first year, according to an Oct. 16 report from DBS Group Holdings Ltd. The government earlier planned to introduce a 4 percent GST by 2011.

“The market is expecting Najib to announce further measures to cut the fiscal deficit,” said Wong Chee Seng, a currency strategist at Ambank Group in Kuala Lumpur. “This is the main driver for the ringgit’s strength today.”

Fiscal consolidation will be good for Malaysia’s economic growth, Wee Choon Teo, a foreign-exchange analyst at Nomura Singapore Ltd., said in an interview today. Any action to rationalize subsidies and implement a goods and services tax will be taken positively by the market, he said.

The KLCI index rose for a seventh day, the longest winning streak since December. The gauge was trading at 15.9 times projected 12-month earnings, a two-month high, compared with 10.6 times for the MSCI Emerging Markets Index. Felda Global Ventures Holdings Bhd. and Petronas Dagangan Bhd. climbed more than 1 percent in Kuala Lumpur, the two largest gainers in the benchmark.

Debt Swaps

Malaysia’s GDP is forecast to increase 4.5 percent to 5 percent this year, after climbing 5.6 percent in 2012, according to an Aug. 21 statement from the central bank. Policy makers have kept borrowing costs at 3 percent since May 2011 to spur growth in Southeast Asia’s third-largest economy.

One-month implied volatility in the ringgit, a measure of expected moves in the exchange rate used to price options, fell 12 basis points, or 0.12 percentage point, to 8.25 percent and is down from 10.96 percent at the end of last month, according to data compiled by Bloomberg.

“The ringgit is likely to strengthen in a knee-jerk reaction to tomorrow’s budget announcement,” Ho Woei Chen, Singapore-based economist at United Overseas Bank Ltd., said in an interview. “Any rise probably will not be sustainable given that focus may return to quantitative easing tapering concerns.”

The lender forecasts the ringgit will weaken to 3.28 per dollar by year-end. That compares with the median estimate for 3.24 in a Bloomberg survey of 36 analysts.

Deficit Target

Malaysia is rated A- by Fitch, the fourth-lowest investment grade. The cost to insure Malaysia’s sovereign debt for five years using credit-default swaps dropped to 111.5 this month from 131.5 on Sept. 30, CMA prices show. That’s down from the year’s high of 157 in August.

Moody’s Investors Service said last month the budget deficit may exceed 4 percent of GDP this year, warning the government’s fiscal targets will become “increasingly out of reach” without additional measures to contain it. The shortfall was 4.5 percent in 2012, while Najib is seeking to cut it to 3 percent by 2015 and to balance the budget by 2020.

A government report tomorrow may show consumer prices rose 2.5 percent in September from a year earlier, compared with 1.9 percent in August, according to the median forecast of 17 economists surveyed by Bloomberg News. That would be the fastest since January 2012.

(Corrects date for ringgit’s high in second paragraph of market story first published yesterday.)
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