(Oct 5): Malaysian bonds beat all their regional peers last quarter, as rising oil prices bolstered the government’s coffers. The expected rollback of oil subsidies in next week’s budget announcement may provide another updraft.

Bonds of the oil-exporting nation returned a relatively small loss of 0.7% in the three months through September, amid a torrid period for global debt markets. In comparison, their counterparts in Indonesia slid 3.6%, while in Thailand, they tumbled 5.7%.

The Malaysian government has been talking about plans to lower oil subsidies for some time to reduce its budget deficit. The Budget 2024 announcement on Oct 13 will reveal a “concrete move” away from the current blanket subsidy system, Economy Minister Mohd Rafizi Ramli said on Bloomberg Television this week. The decision may generate savings of at least US$1 billion (RM4.73 billion) to US$2 billion a year, he said.

A smaller budget deficit would open up the prospect of a reduction in debt issuance.

Net bond supply is expected to be RM86 billion in 2024, versus a forecast RM91 billion this year, said Winson Phoon, the head of fixed-income research at Maybank Securities Pte Ltd in Singapore. Some targeted fuel subsidies “may be confirmed in Budget 2024 to compliment fiscal consolidation”, he said.

For every US$10 a barrel increase in oil prices, the government receives an estimated RM8 billion in revenue, while having to spend around RM6 billion in its blanket fuel subsidies, according to a note from Maybank this week. 

Faltering demand

A reduction in bond supply would be good news, as demand in recent auctions has been faltering. The average bid-to-cover ratio at the sales of five-year Islamic notes and 30-year conventional bonds last month was a combined 1.93 times, versus the 2023 average of 2.11. An auction of 2042 conventional notes on Thursday drew a cover of only 1.77 times.  

Bond supply issues have dogged other Southeast Asian debt markets in recent months. Thai 10-year yields have jumped more than 60 basis points since the end of July, largely on concern new stimulus measures will require greater bond issuance. Indonesia’s yields jumped this week, after the government announced a significantly larger debt supply this quarter than a year earlier.

There may be one potential downside from any Malaysian decision to scale back fuel subsidies - faster inflation. Still, Malaysian consumer prices rose just 2% in August year-on-year, down from 3.8% at the end of 2022, meaning there’s plenty of room to absorb a bit more inflationary pressure without unsettling debt markets.

https://www.theedgemarkets.com/node/684979