Failure to achieve full compliance of the four dimensions of market accessibility – Market, Macroeconomic and Regulatory Environment, Foreign Exchange Market Structure, Bond Market Structure and Global Settlement and Custody — by the next review cycle means Malaysian debt would be ousted from the WGBI. — Reuters photo
KUCHING: Malaysia’s potential exclusion from the FTSE World Government Bond Index (WGBI) will likely see risks of capital flight to be contained within US$3 billion to US$5 billion as the market is still on the ‘Watch List’.
Following its inaugural fixed income country classification review, bond index provider, FTSE Russell, has announced potential exclusion of Malaysian debt from the FTSE WGBI, placing it under a watch list for a six-month period, with another cycle of review slated in September 2019.
The research team at Kenanga Investment Bank Bhd (Kenanga Research) noted that Malaysia is currently assigned a ‘2’ (highest level of accessibility) on the FTSE WGBI, and is being considered for a potential downgrade to ‘1’, which would render Malaysia ineligible for inclusion in the WGBI.
“Based on IMF’s estimate of US$2 trillion of WGBI’s assets under management and Malaysia’s weightage of 0.39 per cent of WGBI, the estimated amount of funds at risk is US$7.8 billion, equivalent to 8.3 per cent of total outstanding Malaysian Government Securities (MGS) and 21.4 per cent of total foreign holdings of MGS.
“However, we foresee risks of capital flight to be rather contained, with outflow of foreign funds estimated to possibly be anywhere between US$3 billion to US$5 billion, in part due to FTSE Russell’s emphasis that ‘inclusion on our Watch List is not a guarantee of future action’.
“This should somewhat help soften the damage to investors’ sentiment, given that the statement suggests enhanced engagement with the government, central bank and regulators in addressing investors’ concerns in the interim period,” the research team opined.
However, it stressed: “In this regard, we expect the government will do whatever is necessary, regulatory and policy-wise, to ensure its bonds remain in the WGBI and hopefully send a positive signal to the global market in terms of quality of its debt instruments.”
WGBI is comprised of sovereign debt from 23 countries, with only four countries from the Asia Pacific region, namely Japan, Australia, Singapore and Malaysia (since 2004).
According to Kenanga Research, entry into the WGBI requires several criteria, such as minimum credit rating of A- by S&P and A3 by Moody’s, as well as Market Accessibility Level (MAL) of 2 (2: highest; 0: lowest).
“In its official statement, FTSE Russell stated that Malaysia is being assessed for a downgrade of its MAL, from the current level-2, to level-1. At the same time, it is assessing a potential upgrade of China’s debt to MAL “2” from “1”.
“Failure to achieve full compliance of the four dimensions of market accessibility – Market, Macroeconomic and Regulatory Environment, Foreign Exchange Market Structure, Bond Market Structure and Global Settlement and Custody – by the next review cycle means Malaysian debt would be ousted from the WGBI,” it added.
Reflecting a knee-jerk reaction, the research team saw that the ringgit depreciated 0.8 per cent to RM4.1423 against the US dollar, while the MGS10-year yield climbed to 3.81 per cent, an increase of 4 basis points (bps), between April 15 to 17, reflective of a big sell down.