Foreign holdings of Malaysian debt securities fall

KUALA LUMPUR: Foreigners reduced their holdings of Malaysian debt securities in May after  Pakatan Harapan (PH) coalition's shock victory in the 14th General Election which Nomura Golbal Markets Research says has given rise to rising risk sentiment.

In its research note issued on Thursday, Nomura said foreign holdings of debt securities fell by US$3.3bil in May from US$52.9bil in April, led by government debt like MGS (US$1.5bil decline) and GII (US$1bil). 

“This likely reflects increased political uncertainty following the shock election results on 9 May, which was exacerbated by a difficult period for risk sentiment in emerging markets (EM).

“Equity markets are adding to the outflows and point to further selling in June: foreign investors sold US$1.4bil in May and another US$400mil as of June 12,” it said.

Nomura Research said the much larger outflows from debt markets underscore a key external vulnerability, given fiscal concerns that “we think are only rising”. 

Despite the selling, the foreign ownership share in MGS still stood at 41.9% in May (US$39.6bil), down from 44.3% in April. 

It also pointed out that the PH government’s quick reversal of crucial reforms such as the Goods and Services Tax (GST) and fuel subsidy rationalisation represented a risk to the medium-term fiscal consolidation agenda. 

“This runs the risk of a spiral between large capital outflows and a weaker currency, given the size of foreign holdings in bond markets, which are particularly sensitive to a deteriorating fiscal position and sovereign creditworthiness,” said Nomura Research.

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