Moody's outlook on the Korean banking system has been negative since May 2016.
PETALING JAYA: Debt related portfolio inflows into the country have returned as foreign holdings of debt securities rise for second month in May by RM10.1bil, although below August 2016 highs, according to Citi Research.
“Foreign holdings of Malaysian Government Securities (MGS) rose RM8.9bil in May, with Bank Negara bills rising RM1.1bil. This marks the second consecutive month-on-month increase
(April: RM6.8bil), since the trough in foreign debt ownership was reached in March (to RM178bil),” Citi said in a report.
However, the research house noted that the cumulative RM16.8bil increase in foreign debt ownership in April to May was less than a quarter of the RM68.7bil reduction that took place between September 2016 and March 2017.
Foreign ownership share rose to 41.8% for MGS, but remains well below recent highs of 51.9% for MGS in October 2016.
Citi said foreign direct investment FDI into Malaysia from China and Hong Kong rose to RM4.5bil in the first quarter of 2017.
“Excluding the exceptionally strong 1Q16 figure of RM11.4bil, this was the strongest Chinese quarterly FDI figure on record, accounting for around 26% of record total quarterly FDI inflows of RM17bil.
“At RM4.5bil in first quarter of 2017, Chinese FDI inflows remain on track to meet or exceed the 2016 figure of RM18.7bil,” Citi said.
The research house said based on recent news flow suggested major port and railway infrastructure projects with significant Chinese interest could total RM300-RM400bil in 10-20 year horizon.
In addition, it said financial account trends positive for ringgit demand, but that could be further augmented by current account demand going forward.
Historically, Citi said quarterly changes in the ringgit versus the US dollar were more strongly correlated with the financial account, as compared to the current account, which correlation turning negative since 2013.
Prior to December 2016, while exporters were required to repatriate proceeds onshore, they were not obliged to convert export proceeds to ringgit.
As such Bank Negara noted just 1% of trade surplus was converted into ringgit from 2011-2015, explaining the weak positive correlation between the ringgit and current account trends.
However, since December 2016, exporters have had to convert 75% of proceeds to ringgit, with the full impact felt from 2Q17 as the grace period ends.
“This should imply an increasingly positive correlation between current account surplus and ringgit demand going forward. We previously noted this rule could add up to US$15-US16bil of forex reserves if fully implemented on an annual basis.
“A positive growth backdrop, improved financial account flows, and incremental support from a current account surplus should remain positive for ringgit demand, with a move closer to 4.0-4.1 levels possible in 2H17,” Citi said.
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