KUALA LUMPUR, April 18 — News that Malaysia might be disqualified from the World Government Bond Index (WGBI) weighed heavily on the ringgit in the global currency market yesterday.
A report by Starbiz also predicted local selloff would intensify, with a potential exodus of almost RM20 billion to RM30 billion from the domestic capital market.
However, the ringgit did recover after the market digested the WGBI advisory but the news still created a sea of red in Malaysia's stock exchange where there were concerns of billions of ringgit worth of capital flight.
At the market’s closing, the ringgit was down 0.05 per cent to RM4.1345 against the US greenback, 0.08 per cent against the pound sterling at RM5.3949 and 0.35 per cent to the euro at RM4.6804.
This depreciation has continued for nearly a month since March 21 and Bloomberg noted that the ringgit is among the worst-performing Asian currencies this year.
FTSE Russell, a stock market index provider, placed Malaysia on its bonds watch list for six months and said the final decision on whether it will be dropped from WGBI might come in September 2019.
The nation's bond market is being considered for a potential downgrade from the current rating of two to one — the lowest on the WGBI — which would trigger the removal.
FTSE Russell's move to review Malaysia's bonds participation came a week after Norway's US$1 trillion sovereign wealth fund was told to cut emerging-market governments and corporate bonds including in Malaysia.
The potential exclusion from WGBI will trigger a reversal of funds from the domestic bond market and severely affect the ringgit and local debt instruments.
Maybank Kim Eng Research predicted the drop is likely to happen unless fundamental changes are made to improve the nation's market accessibility.
“If FTSE Russell decides to remove Malaysia from the WGBI, foreign selling will likely concentrate on the Malaysian Government Securities (MGS), as currently the WGBI index excludes the Government Investment Issues (GII), although the GII curve will inevitably be affected if foreign selloffs weigh on the MGS curve.
“Malaysia's exit from the WGBI is not conclusive but active funds may offload some positions in advance. Actual removal from the index would result in additional outflows, especially from passive funds, and likely further cheapening of the MGS curve,” Maybank Kim Eng reportedly said in a note.
The news pushed Malaysia's FBM KLCI down to the lowest point since 2016 with the benchmark index closing at 1,620.90 points, lower by 0.53 per cent or 8.56 points yesterday.
Year-to-date it is down by 4.12 per cent, making it the worst performer in Asian markets.
VCAP Asset Managers Sdn Bhd chief executive officer Taufiq Iskandar Jamingan reportedly told the English daily that the reason behind FTSE Russell's move was unknown.
“One may point to the liquidity of the market as one of the causes. In addition, despite several shenanigans and incidents of failed governance uncovered recently, the ratings are yet to be affected, raising questions on the state of our fiscal position.
“The market has yet to be presented with concrete plans to diversify and expand the country's revenue base.
“The effects could be extended to the currency market and the ringgit may experience a downward pressure in the short term. As for equity market, investors may seek refuge in yield and value plays as the outflow of foreign funds continues,” he reportedly said.
Touching on the bonds market, AmBank Group chief economist Anthony Dass pointed out that there was room for further consolidation until the final decision is made in six months time.
He added that MGS yields rose by three to 14 basis points across the board as a result of the FTSE announcement.
“Should there be a full withdrawal, the impact on our yields will be around 28 to 32 basis points. Our assessment showed that for every RM1 billion outflow in MGS, the imapct yield is around 1 basis point,” he reportedly said.