A drop in oil revenue adds to Malaysia’s debt burden. Ringgit-denominated notes returned one per cent in the past three months, trailing gains of 5.6 per cent for Indonesian securities, 4.6 per cent in Thailand and 3.3 per cent for the Philippines, according to Bloomberg indexes.
In the past week, Malaysia’s debt lost 0.1 per cent. Overseas investors pulled a combined US$1.7 billion from the nation’s sovereign bonds in September and August, the latest available data shows, while adding to holdings of rupiah and baht securities.
The 30 per cent slump in crude since June will make it harder for Prime Minister Datuk Seri Najib Tun Razak to cut the budget deficit as oil-related industries account for a third of state revenue.
Bank of America Merrill Lynch says should the cost of the commodity stay at current levels, there’s a “high” probability the government will miss its target of reducing the shortfall to three per cent of gross domestic product next year from 3.5 per cent.
“Malaysia is the region’s big loser from the sharp decline in oil prices,” Nicholas Spiro, London-based managing director at Spiro Sovereign Strategy and a former consultant at Medley Global Advisors LLC, said in an e-mail interview.
“If prices stay where they are or keep falling, this will undermine fiscal credibility at a time when there are already growing concerns about the build-up of debt.”
Malaysia is more vulnerable than some of its Southeast Asian neighbours to falling crude prices as it’s a net exporter of the fuel.
The nation’s current-account surplus, the broadest measure of trade, shrank to RM7.6 billion in the third quarter, the least since June 2013.
The government has run a fiscal deficit since 1998 and seen its debt as a proportion of GDP reach 52.8 per cent, near the self-imposed 55 per cent limit.
That’s not prevented the cost of insuring the nation’s bonds from falling.
Five-year credit-default swaps have dropped 45 basis points, or 0.45 percentage point, to 86.7 from this year’s high in February, CMA prices show.
That compares with 144 for Indonesia, 92 in the Philippines and 86 for Thailand.
Brent crude has fallen to $76.29 a barrel since reaching a nine-month high of US$107.73 in June.
The price of Tapis, or Asia’s benchmark grade, was trading at US$79.97, down 33 per cent from 2014’s peak on June 20. The Malaysian government has based its 2015 revenue projection on US$105.
Each 10 per cent decline in crude will worsen Malaysia’s fiscal shortfall by 0.2 per cent of GDP, Chua Hak Bin, a Bank of America economist in Singapore, wrote in a report. In contrast, Indonesia would benefit as a net importer and see savings of 0.4 per cent of GDP, according to the report.
“Poor returns from Malaysian government bonds in recent months have highlighted the problems Malaysia could face in attracting investors next year,” Anders Faergemann, who helps oversee US$4.3 billion of emerging-market debt as senior fund manager in London at PineBridge Investments, said in an e-mail. “Speculation Malaysia could register a current-account deficit in the fourth quarter, its first since 1997, is weighing heavily on investor sentiment.”
The yield on Malaysia’s 10-year sovereign debt climbed 11 basis points in the past month to 3.91 per cent, near the highest since September 29, data compiled by Bloomberg show. That compares with a 21 basis point drop in yield to 7.83 per cent for similar-maturity Indonesian debt and a two basis point decline in Thai securities to 3.21 per cent.
The ringgit is losing support amid the drop in oil prices, the narrowing current-account surplus and as analysts push back bets for an interest-rate increase. No Beneficiary
Economists expect Bank Negara Malaysia to raise the 3.25 per cent overnight policy rate by 25 basis points in the third quarter of 2015 having previously predicted a similar move before the end of 2014. The central bank increased the rate in July for the first time since 2011. The next review is January 28.
Overseas investors cut holdings of Malaysian government debt, excluding bills, in September and August to RM154 billion, the lowest in four months, central bank data show. They added US$2.4 billion of rupiah notes and US$922 million of baht securities in those two months, according to finance ministry and central bank data.
“Clearly, Malaysia’s current account will not be a big beneficiary from the oil-price drop,” Manu George, Asian fixed-income investment director at Schroders Investment Management (Singapore) Ltd, said in an e-mail. “Global funds are selling Malaysian debt as the yields on offer are not as attractive. Yet Indonesia still offers very attractive yields.”
Exports of Malaysian crude petroleum decreased nine per cent in September from a year earlier to RM2.95 billion, the first decline in six months, according a government report.
Fitch Ratings cut the outlook on Malaysia’s A- credit ranking to negative from stable in July last year on concern that the nation’s public finances could worsen. Najib said in an October 10 budget speech that he’s “committed” to cutting the fiscal deficit to 3.5 per cent this year from 3.9 per cent in 2013 and balance the budget by 2020.
“Falling oil prices reduce the trade surplus, which negatively impacts the ringgit,” Angus Salim Amran, the Kuala Lumpur-based head of financial markets at RHB Investment Bank Bhd, a unit of RHB Capital Bhd, said in an e-mail. “This erodes the value of foreigners’ holdings of Malaysian government bonds.” — Bloomberg