Foreigners snap up government bonds at the start of 2021

Foreign Investors Bought MYR3.7 billion Malaysian Debt Securities in January

Malaysia continued to record higher foreign portfolio inflows at the start of 2021 totalling RM2.8 billion (+RM3.0 billion in December). It was mainly led by net foreign buying of Malaysia’s debt securities (+RM3.7 billion in January, +RM3.6 billion in December) while foreigners remained net sellers of domestic equities (-RM0.8 billion in January, -RM0.6 billion in December).

Key domestic events include the spike in COVID-19 infections that led to the reinstatement of the Movement Control Order (MCO 2.0) since mid-January and declaration of a state of emergency (until August 1). Under MCO 2.0, containment measures including social and work mobility were tightened that included a ban on interstate and inter-district travel. However key economic sectors and selected non-essential services are allowed to operate.

Foreigners bought Malaysian Government Securities (MGS) worth RM2.3 billion (or about 61% of total RM3.7 billion debt inflows) last month (+RM2.4 billion in December). This was followed by Government Investment Issues (GII, +RM0.9 billion in January, +RM1.4 billion in December), Malaysian Treasury Bills (+RM0.4 billion in January, -RM0.1 billion in December), and Private Debt Securities including private sukuk (+RM0.2 billion in January, -RM0.06 billion in December).

Foreign holdings of Malaysian government bonds (MGS & GII) remained at the highest level in more than 4 years, at RM205.3 billion or 24.2% of total government bond outstanding as of January (RM202.1 billion or 24.2% in December). For MGS alone, foreign investors’ holdings were RM179.6 billion, which is equivalent to 40.5% of total MGS outstanding (RM177.3 billion or 40.6% in December).

For GII, overseas investors owned RM25.7 billion, which is equivalent to 6.8% of the total GII outstanding in January (RM24.8 billion or 6.6% in December).

Foreigners remained net sellers of Malaysian equities, leaving their ownership of Malaysian equities at a record low of 20.7% of total market capitalisation in January (20.7% in December 2020, 22.4% in January 2020).

Foreign Reserves at 33-Month High of USD108.6 billion

Bank Negara Malaysia’s foreign reserves edged up for the third straight month by USD1.0 billion m/m to a 33-month high of USD108.6 billion as at the end of January (+RM2.3 billion m/m to USD107.6 billion at the end of December). The latest reserves position is sufficient to finance 8.6 months of retained imports and is 1.2 times total short-term external debt.

Foreign reserves were supported by portfolio flows into bonds as well as a strong current account position thanks to a healthy merchandise trade surplus.

While BNM has yet to publish its January 2021 FX swaps data, the central bank’s net short position in FX swaps narrowed for the eighth consecutive month by USD0.6 billion m/m to USD5.8 billion as at end of December 2020 (-USD0.5 billion to USD6.4 billion as at the end of November 2020). It is equivalent to 5.4% of total foreign reserves (6.1% in November), the lowest level since November 2016.

Despite domestic challenges, we think Malaysia’s government bonds remain attractive as capital flows into emerging markets remain strong given low global interest rates and high market liquidity that boosts positive carry-trades.

To watch are the release of Malaysia’s 4Q and 2020 GDP (11 February), BNM monetary policy meeting (4 March), the release of BNM Annual Report 2020 (at end of March), and the FTSE Russell’s March WGBI review. Malaysia will start the first phase of its vaccine program by end of February (for front liners), the second phase in April (for high-risk groups), and the third phase in May (for aged 18 and above).

We think the current global landscape (i.e. global reflation trade, prolonged low-interest rates, and ongoing fiscal support) remains supportive of broad dollar weakness throughout the year. We expect improving recoveries across Asian countries particularly in China to further drive Asian currencies’ strength including RM against the USD. We reiterate our USD/RM forecast of 4.00 by mid-2021 and 3.95 by year-end.