Emerging Markets: report shows Asia pensions growing, but more to do
10 October, 2013Emerging Markets: Nomura attacks Asia’s “addiction to easy money”
11 October, 2013Emerging Markets, World Bank editions, October 2013
Malaysia’s central bank has defended the level of overseas interest in its recent record-breaking 30-year bond after comments that foreign investors had stayed away from it out of concern about the Malaysian economy.
On September 27, Bank Negara Malaysia sold RM2.5 billion ($779.4 million) in 30-year bonds – the longest tenor the sovereign has ever attempted. The deal was successful, with an order book more than two and a half times the size of the final deal and a weighted average yield of 4.935%, considered reasonable for such a long-term security.
However, coverage of the deal has mainly focused on the lack of foreign participation within it, with domestic pension funds and insurers understood to have bought the bulk of the deal. Since foreign ownership of government bonds has fallen from 50.5% in May to 40% in July, this was seen as further evidence of foreign aversion to Malaysia and emerging markets debt generally, and indicative of likely further outflows.
But in written comments to Emerging Markets, Bank Negara has provided further data and defended the deal. “The auction saw diverse investor interest with strong participation by insurance companies and institutional investors who acquired 32% and 23% of the issuance, respectively,” the bank confirmed. It said that non-resident (foreign) investors took 12% of the total issue size. “This ratio is high for MGS of this long tenure”, the bank added, MGS meaning Malaysian government securities. It said the deal “marked another milestone in the development of the Malaysian bond market and yield curve.”
While foreign participation is still usually higher than 12% in Malaysian local currency debt deals, the bank is correct in pointing out that this was a longer tenor deal than has been tried before and therefore naturally more appealing to domestic institutions needing buy-and-hold long term local currency debt. Nevertheless, some investors have voiced concerns about Malaysia’s financial position, with $145 billion of local currency government bonds outstanding on June 30, according to the Asian Development Bank, which put the figure in Indonesia at $89 billion, and Thailand $104 billion. Malaysia is attempting to fund ambitious infrastructure programmes. Last week HSBC trimmed its growth forecast for Malaysia in 2013 from 4.5% to 4.3%, although it expects a recovery to 5.6% in 2014.
Asked about outflows, Bank Negara said that after a May 2013 peak, emerging markets had begun to experience outflows on the back of concerns about QE tapering. But it said: “Despite liquidation by non-residents, [their] holdings of MGS remained high at 42.6% in mid-September 2013. More importantly, the domestic bond market is deep and liquid and able to withstand the outflow as reflected in a relatively smaller increase in the bond yields compared to other markets.” The bank said that foreign holdings have since increased to 44% of total outstanding ringgit debt.
On Thursday Malaysia signed a memorandum of understanding with the Central Bank of the United Arab Emirates to enhance financial services linkages between the two countries, including in Islamic finance.
