Asia: The Burgeoning Bond Market

Asian Development Bank (ADB) in a report today said that emerging East Asia’s local currency bond markets expanded at a faster pace in 2009,thus offering investors diversification and higher yields.

Outstanding volumes in emerging East Asia’s domestic bond markets grew by 16.5 per cent, up from 14.8 per cent as governments issued debt to fund fiscal stimulus measures and as foreign investors sought to tap the region’s fast growing economies, said ADB.

The development bank defines emerging East Asia as China, Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam. It said total bonds outstanding in these markets had reached US$4.4 trillion or some RM15 trillion.

The region comprised 6.7 per cent of the global bond market at the end of September, up from 2.1 per cent in 1996.

Bonds from governments and state-owned firms comprised 49 per cent of the outstanding debt at the end of 2009, compared with 50 per cent in 2008. Corporate debt comprised 30 per cent, up from 26 per cent, while central bank debt fell to 21 per cent from 24 per cent.

But risks could emerge from a reversal in recovery in developed economies, premature monetary policy tightening or destabilising capital inflows.

The ADB expects growth momentum to continue in 2010 as economic recovery gains traction and with the local corporate bond market remaining an additional funding source for borrowers in the region and providing an attractive asset class for investors.

Foreign holdings in Asia’s local currency government bond markets have been rising, reflecting the region’s quick economic recovery, appreciation pressures on their currencies and higher returns.

It showed foreigners owned 18.56 per cent in Indonesia, 11.64 per cent in Malaysia, 6.57 per cent in South Korea, 5.79 per cent in Japan and 3.31 per cent in Thailand as of December 2009, a steady climb over the past few years.

As long a foreigners have faith in our bonds, that should augur well for the economy in the long run.

Fitch's Take on Malaysia

 International ratings agency, Fitch Ratings says that Malaysia requires structural reforms to improve its long-term growth prospects and strengthen a credit profile that came under pressure in 2009 due to deteriorating public finances.

The agency said in a press release today that Malaysia, like many governments and central banks, faces the challenge of timing exits from fiscal and monetary stimulus without tipping the economy back into recession or allowing inflation to get out of control.

“Looking forward, Fitch looks for structural reform to improve Malaysia's long-term growth prospects and see the credit profile strengthen again,” said Andrew Colquhoun, Fitch's director of Asian Sovereign Ratings, at a conference in Kuala Lumpur today, according to the press release.

Malaysia’s A- rating by Fitch is considered investment grade and ahead of Thailand (BBB) and Indonesia (BB+) but behind South Korea (A+), Japan (AA), Australia (AA+) and Singapore (AAA).

In a copy of the conference presentation that was made available to the media, Fitch said that Malaysia’s public debt was climbing and now above the median of its peers.

It also noted that low government revenues were compounded by rising deficits — which hit a high of 7.4 per cent of GDP last year — and increasing dependency on the energy sector.

The Najib administration has said however that it is committed to reducing the budget deficit to around 5.6 per cent of GDP this year.

The presentation also said that Malaysia’s governance indicators in areas such as regulatory quality, political stability, rule of law, control of corruption and accountability were “below ‘A’ range norms”.

The key ratings drivers that Fitch would be looking at will be the country’s budget performance in 2010, revenue reforms and structural reforms especially the highly anticipated New Economic Model to be announced later this month.

According to international news agency Reuters, Colquhoun had also expressed disappointment during the conference that the proposed Goods and Services Tax (GST) was reported to have been postponed.
“That kind of reform and structural improvements in the budget revenue is what we look for to restore positive pressure in the credit ratings," Colquhoun was quoted as saying.

Fitch has forecast the Malaysian economy to grow at 4 per cent this year, which is lower than the Najib administration’s forecast of between 5 and 6 per cent. Fitch expects Malaysia to grow at about the same pace as South Korea and Taiwan and ahead of Thailand (3 per cent) but behind Singapore (5 per cent) and Vietnam (5 per cent).

Malaysia: A Buoyant Economy Awaits

Bank Negara (BNM) governor Tan Sri Zeti Akhtar Aziz said today (24 March 2010),the first quarter GDP growth this year was showing indications of being stronger than the previous quarter, when it expanded by 4.5 per cent.

The central bank also forecast a growth rate of between 4.5 and 5.5 per cent for 2010, depending on the additional economic measures to be announced by the Najib administration as well as external conditions.
“Indications point to that direction,” said Zeti at a media briefing today when asked if current economic signs pointed to a higher growth than in the fourth quarter of last year.

She said the indications include higher loan growth and continued positive export performance.
Prime Minister Datuk Seri Najib Razak voiced optimism that Malaysia could achieve economic growth of between 5 and 6 per cent this year.

Zeti added that the central bank, which recently raised interest rates to avoid potential build up of financial imbalances, would continue to monitor economic conditions but declined to confirm if more interest rate hikes were imminent this year.
“As growth strengthens, we will decide whether to continue normalisation (of interest rates),” she said.
Touching on the issue of bank consolidation, she said that it would be market driven and the central bank had no plans to prompt any consolidation.

Zeti declined to comment on the ringgit’s outlook but said that it would reflect fundamentals.

On the two new Islamic banking and five new conventional banking licenses that will be issued to foreigners, Zeti replied that an announcement will be made in either May or June.

Bank Negara expects Malaysia’s current account surplus to narrow due to faster growth in imports but would remain at a significant RM103.8 billion this year.

The central bank’s net international reserves increased by RM13.8 billion to RM331.3 billion last year, enough to sustain 9.2 months of imports and was 4.3 times Malaysia’s short term external debt.

The bank made a net profit of RM7.7 billion last year and paid out RM2 billion in dividends.

Interesting figures. Hope the country is truly in good hands. 

No Sukuk Bonds for the Rakyat in 2010?

Bank Negara Malaysia (BNM), the main issuer of  sukuk bonds in Malaysia, officially announced that the government will sell RM3.5 billion of Sukuk (Islamic bonds) due on September 30, 2015. Tendering for the paper closes on March 30.

When BNM goes into the market to mop up what they think is excess money from the system,it means they are aggressively trying to take more money out of the system and redirect it for government use. By doing so, the government does not need to go into more deficit financing in its annual budgets or to mount  additional taxes. At the same time, when the free float of cash or near cash is narrowed, inflation can somehow be better managed and the bubble be averted.

So who pays for these papers? Those who will buy these papers range from insurance companies to pension funds and the like such as Tabung Haji,EPF and SOCSO who are collecting money from the citizen every single month. Unit trusts such as Permodalan Nasional could also be buying the funds and so are Islamic-denominated funds.

It is interesting to note that that the government did mention in the 2010 Budget that they will be issuing sukuk funds. Is this that move? If that is so, then there will no longer be any sukuk funds to be provided for the rakyat's subscription  in 2010. If that be the case, then ASM1 could indirectly be targeted if it could announced a good maiden dividend in August 2010.

Let us wait and see.