Background Summary

Credit spreads are likely to widen, but to remain relatively tight in the coming year – Our expectation is that in 2024, ringgit credit spreads will remain tight near their current range, though lifted slightly as spreads rebound from record levels.

We base our outlook on the following factors: 1) improvements in credit health alongside firm GDP growth; 2) continued accommodative monetary policy; and 3) modest increase in net issuance of PDS set for 2024.

Steadier GDP growth offers expectations of better corporate sector returns and healthier cashflows, and thus providing little impetus for repricing of credit risks. Meanwhile, accommodative monetary policy and improvements in financial conditions should support sentiment. Alongside moderate inflation outlook and end to global and domestic monetary tightening, our forecast is for sustained OPR up to end 2024 at 3.00%.

As we go into 2024, our anticipation is for net PDS issuances to show a modest increase as GDP grows and capacity in the economy increases via a rise in investments. This will limit the downside to PDS yields in the coming year. Lastly, we note there is dislocation, or misalignment, in the credit curves of some issuers amid the current profit-taking activity. These include GG and AAA curves. We foresee downward curve realignment to occur in the short to medium term, if our assumption for PDS yields will show modest downside comes true in 2024.

We expect credit spreads to remain tight, after a rebound from record levels

Our expectation is that in 2024, ringgit credit spreads will remain tight near their current range, though lifted slightly as spreads rebound from record levels.

We base our outlook on the following factors: 1) improvements in credit health alongside firm GDP growth; 2) continued accommodative monetary policy; and 3) modest increase in net issuance of PDS set for 2024.

Continued improvements in credit health amongst corporate bond issuers. Steadier Malaysia GDP growth from this year and into 2024-2025 offers expectations of better corporate sector returns and healthier cashflows, and thus providing little impetus for repricing of credit risks.

• Corporate balance sheets levels are showing improvements while cash flows remain healthy, based on data from Bloomberg on KLSE Emas Index as well as the Construction Index companies (Exhibits 5-8) up to end 3Q2023. Assets continued to grow, outpacing liabilities, while debt-to-equity levels remained controlled at below 90%. For the KLSE Construction Index members, debt-to-equity levels were near the 89% level.

• Rating downgrades look contained while Positive rating outlooks look encouraging. RAM and MARC numbers show debt facilities downgrades totalling 11 YTD 2023 (2022: 8), while upgrades total 13 in YTD 2023 vs 14 in 2022. Meanwhile, rating outlook change to Positive is five (5) in YTD 2023 vs two (2) in 2022 though there are three (3) facilities placed on Negative watch in YTD 2023 (Exhibit 4).

Monetary policy will remain accommodative and financial conditions should improve, supporting sentiment in the bond market. Alongside moderate inflation outlook and end to global and domestic monetary tightening, our forecast for sustained OPR up to end 2024 at 3.00% and anticipation that MGS yields will undergo a modest decline in 2024, will continue to support sentiment for PDS. As it were, moderation of inflation in recent months has raised the attractiveness of bonds by way of higher real yields (Exhibit 10).

• Inflation expectation – Inflation in 2024 is expected to fall within a range of 2.5% to 3.5%, considering the effects of subsidy rationalisation and the impact of the services tax increase. However, there is an upside risk to this outlook if (or when) the scope of rationalisation extends to RON95 fuel.

• Growth view for 2024 – Our GDP growth forecast for Malaysia remains at 4.0% for 2023 and is expected to pick up to 4.5% in 2024. The weak export sector is anticipated to recover in 2024 due to easing inflationary pressures in major economies. On the domestic front, measures announced in Budget 2024, particularly those aimed at boosting consumption, are anticipated to support growth. However, the impending subsidy rationalisation, which includes food and fuel in 2024, may lead to changes in consumer spending priorities.

• Financial conditions are anticipated to loosen, thereby financing costs should decline in 2024. Banking sector lending rates, which is now about 5%, should consolidate to below that level in 2024 if interbank rates also show impetus to slide slightly in anticipation of OPR cuts post-2024. (Exhibit 9).

Source: AmInvest Research - 1 Dec 2023