KUALA LUMPUR, April 21 — Bloomberg continued its gloomy reporting on Malaysia’s bonds situation today, suggesting that even an interest rate cut would not be enough to stem the outflow of foreign capital from the country.
Again citing the FTSE Russell’s warning of a downgrade that would effectively exclude ringgit-denominated bonds from its world bond index, Bloomberg asserted that the local economy was also at the confluence of economic problems.
Among these are the ringgit’s chronic underperformance in the global currency market, the continued foreign investor sell-off of Malaysian equity, and weak commodity prices particularly for palm oil that is a key export.
“The bond market may be in for some volatility, if speculation increases over the country’s potential exclusion of the World Government Bond Index,” Anders Faergemann, a London-based senior money manager at Pinebridge Investments, told Bloomberg.
“We would not immediately step in to buy Malaysian local bonds in spite of rising prospects of a rate cut.”
Malaysia experienced a brief period of disinflation in January and February.
Central banks typically reduce interest rates during periods of low inflation in an attempt to stimulate consumer borrowing and spending.
Bloomberg predicted that a third straight month of disinflation in March could prompt the central bank to review its overnight policy rate of 3.25 per cent on May 7.
“There is scope for Bank Negara Malaysia to initiate a cut in the second half, reversing the 25 basis points hike of early 2018,” State Street Global Markets macro strategist Dwyfor Evans was quoted as saying.
“But no more, given fears over resurgent inflation and rate differentials.”
Malaysians continue to complain about their cost of living despite the Pakatan Harapan government’s move to repeal the unpopular Goods and Services Tax (GST) last year and replace it with the Sales and Services Tax (SST).
Citing a Morgan Stanley report, Bloomberg said a potential US$8 billion (RM32 billion) could flee Malaysia in the event the country is dropped from the World Government Bond Index in September.
FTSE Russell is considering downgrading Malaysia to a rating of 1 — the lowest — in the WGBI that would exclude the country from retaining its place in the index.
The move to review Malaysia’s bonds participation came after Norway’s US$1 trillion sovereign wealth fund was told to cut emerging-market governments and corporate bonds including in Malaysia.