Interest rate hike pause likely on falling commodities


KUALA LUMPUR: Falling commodity prices will confer spillover benefits on taming inflationary pressures around the world, and this will pause possible rate hikes.

“Commodity prices are the wild card here. Lower commodity prices reduce inflationary pressures and justify delaying monetary policy tightening. This helps keep policy rates lower for a bit longer, as inflationary pressures are not there to warrant a quicker increase,” World Bank senior economist Dr Frederico Gil Sander said.

Speaking at his presentation at Rating Agency Malaysia Bhd’s Annual Bond Conference on the Asian Bond Market: Risks and Opportunities, Sander said that this scenario also made it easier for countries such as Malaysia to juggle their subsidy bill requirements.

“This can be helpful in terms of this consolidation. But you may also have large amounts of oil revenues, so one would have to look carefully at the balance of the impact,” he said.

This situation might also make it difficult for the Government to achieve its fiscal consolidation targets, he added.

Sander noted that the past few years of high oil prices had produced plenty of investments and capital expenditure into the sector, which had vastly increased its supply.

“We already see a lot of this development in the United States, including the additional supply that more than offsets the disruptions from the geopolical risks we have seen,” he said.

Meanwhile, chief executive officer of RAM Rating Services Bhd Foo Su Yin said that investors today seem to be keener on higher-yielding bond assets in Malaysia.

“The demand is so strong that the moment it goes up (for sale), the yield is so low. Many investors today are willing to take up unrated papers because they can actually get better yields if it doesn’t go into the market,” Foo said.

“Moving forward, unrated papers will pose a challenge to us. One is from the issuer itself. From their point of view, if they are already well-recognised, they would think there may be no need to rate their papers since they are well-recognised in the market. With a rating, the issuer would be subject to the (lower) yields in the market,” she added.

Foo also noted that RAM’s portfolio for Malaysian corporates had been “quite stable” since the 1997 Asian financial crisis, with “more upgrades than downgrades”, indicating that agency-rated corporate balance sheets are generally quite healthy at present.

“In 1992 to 1996, we had zero defaults. In 1997, we had one, while in 1998, we had 16. And subsequently, over the years, it has been quite minimal. More recently, in 2010 and 2011, we had zero defaults, while in 2012, we had one and subsequently zero (in 2013),” she said.

“Even in 1998, where we had 16 (defaults), quite a number of these were actually bank-guaranteed at that point in time, and because of the crisis, bank guarantees also started falling out of favour, as many of the banks were caught,” Foo added.

Meanwhile, in his opening speech earlier, Khazanah Nasional Bhd deputy chairman Tan Sri Nor Mohamed Yakcop said that more efforts were needed to tap Asia’s large savings and significant international reserves to meet the region’s strong demand for capital.

He added that the surplus funds could collectively be utilised to meet these infrastructure investment needs.

Banking , Commodities , oil , RAM