MARC: Further foreign selling of Malaysian govt bonds not ruled out

PETALING JAYA: Malaysian Rating Corp Bhd (MARC) does not rule out the possibility of foreigners offloading 20% to 25% of their current holdings of Malaysian Government Securities (MGS), which is less than the 50% to 70% reductions during the previous cycle, based on past experience.
In its report “Economic Outlook 2017: Coping with Global Political & Economic Challenges”, MARC said the estimate is premised on the fact that a bigger chunk of the holdings now consist of “longer-term investors” such as central banks and pension funds, though it is of the view that asset managers should not be classified as “long-term investors”.
Hence, MARC said, there is a risk of the ringgit remaining weak if the sell-offs persist in the short term given that about 48% of MGS were held by foreign investors at the end of November.
“On balance, we think that there is still room for further depreciation in the ringgit against the greenback, although the weakness will not likely continue in the medium term,” it opined.
MARC reiterated that monetary space is more limited than it seems despite Malaysia having more downside room for its interest rate compared with other Asian countries.
Citing downward pressure on the ringgit against the US dollar, the rating agency believes the probability of an interest rate cut is rather slim.
“Even in the absence of downward pressure on the ringgit, we do not think that the Bank Negara Malaysia (BNM) would tinker with the Overnight Policy Rate (OPR) too much as there are concerns over an overstretched level of household debt,” it said.
Against the prospects of further weaknesses of the ringgit, MARC is of the view that the OPR will be more or less unchanged in 2017, with a limited reduction, if there is any, of 25 basis points as the monetary stance has to be tailored to minimise the volatility of the ringgit.
The country’s performance in the first nine months, it said, suggests that the government’s efforts to achieve the targeted budget deficit of 3.1% of gross domestic product (GDP) in 2016 will remain challenging.
“Recent statistics revealed that it is the first time since 1999 that total revenue in the first nine months of 2016 actually declined while expenditures increased (by -6.4% and +2.1 respectively). Prior to this, the drop in revenue had always been accompanied with a decline in expenditures,” it said.
Therefore, MARC said going forward, measures to generate additional revenue from alternative sources (such as Goods & Services Tax) and the efforts to reduce expenditures through further subsidy liberalisation (electricity tariff rebates and sugar subsidies, etc) will likely continue.
“Overall, we think that achieving the budget deficit target of 3.0% of GDP in 2017 will remain a challenging task, especially when nominal GDP growth is not expected to improve dramatically,” it said, adding that a more flexible budgetary stance may be required to ensure a decent growth of the economy in 2017.
MARC said domestic demand will continue to support the economy on the back of stronger momentum in private investment, which offsets a slower growth in private consumption.
However, the lag effect of a weaker job market will likely cause private consumption to moderate in 2017 while stringent credit assessment will result in weaker loan growth, especially to households. The jobless rate has climbed to 3.5% in Q3, the highest level since the first quarter of 2010.
Notwithstanding this, MARC does not foresee a sharp deterioration in consumer spending growth in the near term.
“On balance, we envisage Malaysia’s headline GDP growth to remain below trend at 4.0% in 2017,” it said.
MARC said the lag effect of the cooking oil subsidy removal in November and surging global food prices in the past few months will likely be felt early next year, with the inflation rate expected to climb to 2.5-3% in 2017.
“There is a possibility of further subsidy rationalisation as the government remains committed to its fiscal consolidation efforts. The recent rally in commodity prices and the weakening of the ringgit will likely generate some upward price pressure as well,” it added.