MARC: Foreign holdings of govt debt to go up

PETALING JAYA: Foreign holdings of government bonds are expected to increase towards the end of 2018 and record a net positive inflow, according to the Malaysian Rating Corp Bhd (MARC).
This is on the back of expectation of an overnight policy rate (OPR) hike in early 2018; upbeat outlook of the ringgit; improvement in crude oil prices; and strengthening of the US economy that could lead to a faster pace of interest rate normalisation.
“The lower volume of maturing Malaysian Government Securities (MGS)/ Government Investment Issues (GII) papers in 2018 with a projected total value of RM62.8 billion should also provide support,” MARC said in a report titled “2018 Bond Market Outlook: Getting Back in Cycle”.
The rating agency expects gross issuance of MGS/GII in 2018 to come in within the range of RM100 billion to RM105 billion, premised on the government’s budget deficit estimate of RM39.8 billion (as per Budget 2018); RM62.8 billion worth of MGS/GII papers projected to mature in 2018; and MARC’s forecast of a GII-to-MGS ratio of 44:56.
On corporate bonds, the primary market’s gross issuance this year is estimated to be in the range of RM90 billion to RM100 billion, slightly higher than the earlier projection of RM85 billion to RM95 billion.
This will be driven by sturdy pipeline of issuances from the government guaranteed (GG) segment related to the financing of current and new large-scale infrastructure projects, including the extensions of the LRT 3 and the MRT 2 lines as well as the ECRL and the Merdeka PNB118 tower.
“The primary market is expected to take a breather in 2018 following a bumper year in 2017 when issuers had rushed to raise funds given the prospects of monetary policy normalisation and therefore likely higher borrowing costs ahead.”
Unrated corporate bonds issuance is also expected to continue growing because of savings on issuance costs as well as capital market incentives introduced in Budget 2018.
In the secondary market for MGS and corporate bonds, MARC anticipates bond yields to increase gradually in 2018.
Meanwhile, MARC anticipates Bank Negara Malaysia to hike the OPR by between 25 and 50 basis points this year given the increased likelihood of Malaysia’s gross domestic product growth hitting above the 5% level again in 2018.
The research house also expects both cost-push and demand-pull factors to keep the inflation rate hovering at around 3% in 2018, with the lagged inflation effect of both higher pump and food prices in the last few months of 2017 to persist.