Overview

• Foreign debt holdings decline. The foreign holdings of Malaysian debt securities fell by RM2.8b in October (Sept: +RM9.3b). The outflows were partly due to a RM3.5b decline in MGS. Consequently, foreign holdings of total Malaysian debt securities edged down to 15.4% from 15.7% in September.
• Partly due to large MGS redemption in October. An estimated RM12.2b worth of MGS was due for redemption in October. Generally, a large scheduled bond maturity would result in a net decline in foreign bond holding.
• Fed December rate hike expectation raising outflow risk. One of the main reasons for the decline in foreign bond holdings in October was the rising probability of a Fed rate hike in December. Along with the US proposed tax reforms, Saudi Arabia’s corruption crackdown, and North Korea’s sabre rattling, the volatility of foreign funds flows in the local debt market would remain elevated in the near term.
• OPR to be held steady. In view of the rising volatility of fund flows in the local debt and equity market, BNM is expected to maintain an accommodative monetary policy. With economic growth expected to taper and the coming general election somewhere early next year, we maintain our view that the OPR would stay at 3.00% till at least the 1H18.

Foreign holdings decline. Following the large Malaysian Government Securities (MGS) redemption activities for the month and external uncertainties, the foreign holdings of Malaysian debt securities declined in October after a solid net inflow registered in the previous month. Net foreign outflows on Malaysian debt securities amounted to RM2.8b in October, compared to a net inflow of RM9.3b in the prior month. As a result, the foreign holdings of total Malaysian debt securities dipped to 15.4% from 15.7% in September.

Holdings relatively stable. The net foreign outflows seen in the local debt market is mainly attributed to a RM3.5b decline in MGS (Sep: +RM5.8b); followed by a drop of RM0.6b in Private Debt Securities (PDS). However, foreign holdings of MGS remained stable at 42.7% (Sep: 42.8%) as total MGS outstanding fell concurrently. On the other hand, the Islamic featured Government Investment Issues (GII) registered another month of positive net foreign inflow of RM1.3b (Sep: +RM2.1b), partly offsetting the foreign outflows in MGS. The relatively manageable foreign fund flows suggest that the local debt market has so far remained resilient to bouts of foreign outflows related to investors’ expectations of the Fed’s tightening cycle.

High MGS redemption. The MGS saw a relatively large scheduled redemption in October of about RM12.2b maturing securities. Consequently, the total outstanding value of MGS fell RM6.7b to RM359.2b in October. This means that slightly more than half (RM3.5b) is attributable to foreign redemption, assuming new issuance and rollover amounting to about RM5.5b. It is important to note that around RM14.1b and RM8.8b of MGS will mature in February and March of next year respectively, raising the risk of capital outflows during these periods.

Steady reserves amidst mild equity outflows. Meanwhile, foreigners remained net seller in local equity market for the third month in October. Foreign net selling of local equity totaled RM0.2b in October (Sept: -RM0.7b). In general, the financial market remains largely resilient as Malaysia’s stronger than expected economic growth appeals to domestic and foreign investors alike. The ringgit has also been hovering steadily in a tight range of around USDMYR 4.22-4.25. This has provided some support for a gradual rise in foreign reserves. The foreign reserves edged up USD0.3b to USD101.5b at end-October, extending its rising trend for the tenth straight month and reaching the highest level in 28 months.

December rate hike expectation to pose outflow risk. One of the main reasons for the decline in foreign bond holdings in October was the rising probability of a Fed rate hike in December. Following the Fed’s projection of a more sanguine economic outlook in its November FOMC statement, the odds are increasing that the Fed will raise the fed funds rate for the third time this year in December. Indeed, a slew of economic data releases, including the upbeat labor market and services data, are likely to provide further evidence of economic resilience that would warrant the Fed’s tightening.

Fund flows volatility to remain elevated. Along with the US proposed tax reforms, Saudi Arabia’s corruption crackdown, and North Korea’s sabre rattling, the volatility of foreign funds flows in the local debt market would remain elevated in the near term. However, we do not anticipate adverse impact of any such outflows on the financial market. On the other hand, we believe the latest nomination of incoming new Fed Chair Jerome Powell would signal a continuity of Fed’s current monetary policy tightening path. This would imply some risks of funds outflows and tighter liquidity in the financial market over the medium term.

Holding back steady on policy rates. Despite the rising expectations of Fed rate hike in December, the relatively stable fund flows in the local debt and equity market signal that BNM’s monetary policy would remain accommodative to support growth and to preserve stability of the financial market operations. In view of the rising volatility of fund flows in the local debt and equity market, BNM is expected to maintain an accommodative monetary policy. With economic growth expected to taper and the coming general election somewhere early next year, we maintain our view that the overnight policy rate (OPR) to stay at 3.00% till at least the 1H18.

Source: Kenanga Research - 9 Nov 2017