Foreign holdings of government bonds reach 4-year high

Foreign Investors Continued To Buy Malaysian Debt Papers In Nov

Foreign portfolio inflows persisted in Nov, albeit at a slower pace (Nov: +RM0.8bn vs. Oct: +RM7.3bn) as foreigners continued to snap up Malaysian debt securities by RM1.9bn (Oct: +RM8.0bn). This marks the seventh month of net foreign inflows entering domestic bonds which helped to offset continued net foreign outflows from Malaysian equities (Nov: -RM1.1bn; Oct: -RM0.7bn).

As such, the year-to-date foreign portfolio outflows narrowed to -RM9.3bn in Jan-Nov 2020 (from -RM10.2bn in Jan-Oct 2020), with debt inflows totalling +RM14.8bn while equities outflows amounted to -RM24.1bn.

November’s debt inflows were primarily driven by Malaysian Government Securities (MGS, at +RM1.8bn vs. +RM3.9bn in Oct), Government Investment Issues (GII, at +RM0.9bn vs. +RM2.4bn in Oct), and Private Debt Securities excluding Private Sukuk (at +RM0.5bn vs. +RM0.07bn in Oct). These fully offset the outflows seen in Malaysian Treasury Bills (at –RM0.2bn vs. +RM2.5bn in Oct), BNM Bills (at -RM1.0bn vs. -RM1.0bn in Oct), and Private Sukuk (at -RM0.06bn vs. +RM0.06bn in Oct).

As such, foreign holdings of Malaysian government bonds (MGS & GII) increased by RM2.7bn to a 4-year high of RM198.4bn in Nov (Oct: +RM6.3bn to RM195.7bn), which is 23.9% of total outstanding (Oct: 23.8%).

For MGS alone, foreign holdings amounted to RM175.0bn or 40.1% of total MGS outstanding (Oct: RM173.2bn or 40.3%), while for GII, overseas investors held an outstanding amount of RM23.4bn or 6.3% of total GII outstanding (Oct: RM22.6bn or 6.1%).

Foreign Reserves At 2½-Year High

Bank Negara Malaysia’s (BNM) foreign reserves rose by USD0.7bn m/m to a 2½-year high of USD105.3bn as at end-Nov (from USD104.6bn as at end-Oct). The latest foreign reserves position is sufficient to finance 8.6 months of retained imports and is 1.2 times total short-term external debt. Further debt inflows, foreign direct investment, and sustained current account surplus are likely to be the main drivers of foreign reserves.

While BNM has yet to publish Nov 2020 FX swaps data, the central bank’s net short position in FX swaps narrowed for the seventh straight month by USD0.3bn to USD6.9bn as at end-Oct (end-Sep: USD7.2bn). It is equivalent to 6.6% of total foreign reserves (Oct: 6.9%), the lowest level since Mar 2018.

Temporary Knee-Jerk Reaction Post-Fitch Downgrade

Following Fitch Ratings’ downgrade of Malaysian sovereign rating to ‘BBB+’ from ‘A-’ with a ‘Stable’ outlook last Friday (4 Dec), there was mild sell-off in both the Malaysian Ringgit (MYR) and longer-dated Malaysian government bonds yesterday (7 Dec).

The MYR depreciated by 0.2% to 4.0720 against the USD from last Friday’s closing of 4.0620, while the 7- and 10-year MGS yield rose 4.3bps to 2.527% and 2.7bps to 2.730% respectively from last Friday’s closing of 2.484% and 2.703%.

However, we expect this knee-jerk reaction to be temporary as underlying sentiment is firm amid a better domestic growth outlook for 2021, sustained low interest rates, mild bond supply concerns next year, and expectations of broad dollar weakness. Anticipations of a gradual recovery in crude oil prices amidst global economic reflation will also help reinforce the MYR.

Hence, we reiterate our view for USD/MYR that it will ease to 4.00 by end 2Q21 and 3.95 by end 4Q21. The upcoming key domestic events to watch are S&P and Moody’s next review on Malaysia’s credit rating, as well as FTSE Russell’s next review of Malaysia’s WGBI index weight in Mar 2021.