Malaysia Bonds, Ringgit Drop as Najib Flags $7 Billion Shortfall

  • Prime minister repeats warning signalled in budget speech
  • Oil decline hurts sentiment just as 1MDB readies asset sales

Malaysian bonds fell and the ringgit’s three-day gain petered out after the New Straits Times cited Prime Minister Najib Razak as saying the government faced a 30 billion-ringgit ($7 billion) shortfall in 2016 due to a slump in oil prices.

The decline in bonds drove 10-year yields to the highest this month, while the currency dropped 1.1 percent to 4.2615 a dollar in Kuala Lumpur, erasing its 0.4 percent gain over the previous three days, according to data from local banks compiled by Bloomberg. 

Najib’s comments underscore the government’s struggle to trim the budget deficit as the slide in crude prices saps revenue for Asia’s only major net oil exporter. The prime minister first flagged the possible deterioration in his October budget speech, when he said earnings from oil-related sources were 62 billion ringgit when crude averaged $100 a barrel, and that it would fall to 31.7 billion ringgit next year. Brent crude slumped 5.3 percent on Monday, the biggest decline since early October.

“The lower oil prices will have an impact on the fiscal position if they stay this low,” said Khoon Goh, a senior foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. in Singapore, adding that he’s currently reviewing his ringgit forecast for next year.

OPEC, 1MDB

The Organization of Petroleum Exporting Countries on Friday refrained from cutting output to shore up prices amid a global glut, and instead abandoned a long-time strategy of limiting daily production quotas. Brent rose 0.8 percent to $41.07 a barrel in Asia on Tuesday, less than the $48 assumption in Najib’s budget for next year. He aims to lower the fiscal shortfall to 3.1 percent of gross domestic product in 2016, from the targeted 3.2 percent this year.

Sentiment on Malaysian assets was starting to improve as debt-ridden state investment company 1Malaysia Development Bhd. geared up to sell some property assets in Kuala Lumpur valued at 11 billion ringgit. That followed an agreement last month with China’s General Nuclear Power Corp. to offload 1MDB’s power assets for 9.83 billion ringgit.

While ANZ’s Goh said the 1MDB asset sale means there’s no need for the government to bail it out, the reduction in oil will put the deficit goal at risk and some policy changes such as spending cuts will be needed. Najib is counting on a new 6 percent goods and services tax introduced in April to take up the revenue slack.

The yield on Malaysia’s 10-year government bonds rose four basis points to 4.25 percent, the highest since Nov. 24, according to stock exchange prices. Global funds increased holdings of the country’s sovereign and corporate debt by 1.9 percent in November from a month earlier to a seven-month high of 213.6 billion ringgit, the latest central bank data show.

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