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Tuesday, July 9, 2013

Foreign funds to continue supporting local MGS market, says MARC


Published: Monday July 8, 2013 MYT 4:55:00 PM 
Updated: Monday July 8, 2013 MYT 4:57:34 PM

KUALA LUMPUR: Malaysian Rating Corporation Bhd (MARC) expects foreign funds to continue supporting the Malaysian Government Securities (MGS) despite the possiblity of increasing capital outflows.

In its second half 2013 Malaysian bond market outlook issued on Monday, it said the concerns were triggered by the US Federal Reserve's announcement of the possibility of scaling back bond purchases in the third week of June.

"This is premised on the strong demand for MGS bonds, evidenced by the overwhelming demand for the government's new issuances which registered an average bid-to-cover ratio of 2.03 times during the debt auctions in 1H2013.

"Investors also appear to be generally confident about the long-term prospects of the economy as reflected by the high bid-to-cover ratio of 2.88 times for the 20-year notes, although the ratio for the 15-year notes moderated to 1.57 times recently," it said.

MARC said as of the first quarter of 2013, foreign investors held about RM138.10bil worth of MGS or 47% of total outstanding MGS securities compared to only 17% of total outstanding in 2009.

The ratings agency also said the second factor was based on the real interest rates, foreign investors would continue to favour the Malaysian market due to the relatively higher real returns among regional peers.

It also said monetary authorities in some Asian countries had started easing their monetary stance in the second quarter of 2013, trimming their policy rates to avert the negative impact on their economies.

For instance, Australia cut its benchmark interest rate by 25 basis points (bps) to 2.75% while South Korea and Thailand lowered their key interest rates to 2.50% each from 2.75%.

“As we believe there will be more central banks joining the easing wave in the near term while Malaysia maintains its policy rate unchanged, Malaysia's attractiveness to foreign capital will persist, especially when the country's inflation rate is not expected to pick up tremendously during the rest of the year,” it said.

MARC said there were several reasons why it expected Bank Negara Malaysia (BNM) to maintain the overnight policy rate (OPR) rate at 3% for this year.

These factors included strong domestic demand to offset the weaknesses in the external sector; (2) high household debt, and (3) stable inflation.

MARC projected inflation to be capped at 2% this year, down from the initial estimate of a 2.5% maximum rate.

It pointed out this was based on the delay of subsidy rationalisation and the implementation of Goods and Services Tax (GST).

Another reason for expecting a reasonable strong demand for MGS is prospect of the Malaysian economy which is expected to remain resilient in 2013, albeit growing at a softer pace compared to 2012.

MARC pointed out the economy would be supported mainly by strong domestic demand resulting from resilient private consumption and private investment.

Although the Q1, 2013 GDP grew at a moderate pace of 4.1%, missing economists' forecast of 5.5%, it was primarily due to weaker exports. In contrast, domestic demand was robust and increased by 8.2% during the quarter, bolstered by private investment and private consumption.

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