Economy, Featured and Exclusive  |  FEBRUARY 19, 2013 6:32AM

Record foreign holdings of govt bonds not all “hot money”

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ringgit-malaysia-and-us-dollar-genericForeign holdings of Malaysian government securities (MGS) has ballooned to a record level of 44 percent or RM129.7 billion but this is not all ‘hot money,’ analysts told KiniBiz. Most ruled out the possibility of a repeat of the 1997 Asian financial crisis when the region was flung into turmoil by sudden capital outflows.

Barisan Nasional, which has ruled the country for 55 years, must call an election soon and is in a fight to regain the two-thirds majority in parliament which it lost in the last elections in 2008. Observers said this is likely to be Malaysia’s most hotly contested elections ever. Election uncertainties have caused market jitters too.

“At this juncture, foreign funds appear to be the biggest holders of MGS, holding amounts even higher than the Employees Provident Fund,” Malaysian Rating Corporation Berhad (MARC) said in a research note, published on Monday.

“Should jitters surrounding the general election emerge among foreign investors, the likelihood of a sell-off in the local currency should not be dismissed,” it said.

Bank Negara data showed that foreign holdings of Malaysian government securities had reached RM129.7 billion, or 44 percent of total MGS as at end-December 2012. A year before that, it amounted to RM102 billion or 37 percent of the total. They have been rising from 2008 when foreign holdings comprised less than 14 percent or around RM29 billion.

The ringgit has already been partially shaken by the news of elections, which must be called by June 28. On Monday, it depreciated 0.7 percent to 3.0995 per dollar, according to data compiled by Bloomberg. That’s the biggest decline since Jan 31. It has dropped 2.8 percent over the past month and is the second-worst performance among Asia’s 11 most-active currencies, Bloomberg reported.

In 2012, the ringgit mostly rose against the dollar, helped by a net inflow of foreign funds into the Malaysian bonds market. Bond analysts said that the rise in foreign holdings on Malaysian bonds was also matched by similar increases in Thailand and Indonesia.

There has been a worldwide capital flight from developed to emerging economies as bond investors sought higher yields. In particular, money was flowing from the United States, where government debt reached a limit of nearly $16.4 trillion and interests rates were low..

Analysts however downplayed the risk of a systemic shock to the Malaysian economy because of the elections, whether or not it will result in a change of government.

“There is real money around in fixed income and I am not so concerned about worst case scenarios,” said Lum Choong Kuan, CIMB Investment Bank’s Head of Regional Fixed Income Research.

He noted that equity markets slumped following the last elections in 2008, when the opposition denied two thirds majority to the ruling coalition and the ruling Barisan Nasional had its worst showing in Malaysian history, which was still just eight seats short of a two thirds majority. He said bond market yields in contrast were relatively stable.

“The ringgit may be affected but it will not be because of a pull out of fixed income,” Lum said. “For bonds, alarm bells will ring only when U.S. becomes more hawkish (in terms of monetary policy which could raise interest rates).”

Anthony-DassAnthony Dass, chief economist at MIDF Investment Bank, said that they did not expect the ringgit to depreciate this year even as some outflows can be expected later this year when U.S. and Europe may recover.

“Policymakers could be implementing selective capital controls judging from past experience of 1997/1998,” Dass told KiniBiz “There may be a mild correction and not severe shock.”

MIDF expects the ringgit to trade around 3.07 per US dollar, about the same rate as last year as exports could also pick up to counter any weakness.

Malaysia’s bond market is Southeast Asia’s biggest local currency bond market. The MARC report further said that the Malaysian government may issue RM90-95 billion of new bonds in 2013. The corporate bonds sector could issue RM75-90 billion debt this year.

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