Malaysian debt risk on uptrend

PETALING JAYA: The risk on Malaysian debt has increased, with the credit default swap (CDS) rising to a one-year high amid concerns on the country’s macroeconomic outlook.

The CDS of the five-year ringgit bond – an indication of the strength of the government debt papers – was at 106 basis points (bps) at the time of writing. It has steadily gone up since January this year.

The highest the CDS traded was in September 2015 when it hit 242 bps during the time when oil prices were at their low.

Prior to 2015, the CDS also surged in mid-2014 when the 1Malaysia Development Bhd crisis just broke out, leading to an open confrontation between former Prime Minister Datuk Seri Najib Tun Razak and some of his supporters.

According to an analyst, the weakening of Malaysia’s CDS is due to several factors such as the news flow of the government debt being higher than what was reported previously, the general outflow of foreign funds from the region due to the strengthening of the US dollar, as well as the deteriorating economic outlook due to the trade war between the United States and China.

Maybank Kim Eng analyst Winson Phoon said that the widening of the CDS spread was due to a combination of the deteriorating broad emerging market outlook and higher risk attached to Malaysia because of uncertainties post-general election (GE), as well as the negative news flows regarding the RM1 trillion debt.

“The CDS spread is a gauge of market fear. A widening CDS spread suggests a change in perceived market risk in sovereign credit. But it does not necessarily mean that rating agencies will downgrade Malaysia’s rating,” he told StarBiz.

Phoon pointed to September 2015 when the CDS spread was the highest and yet Malaysia’s sovereign rating was maintained at A3/A-.

The Pakatan Harapan government has tagged Malaysia’s debt at RM1.09 trillion, including contingent liabilities of RM199bil. The previous government had stated national debt at RM686.8bil and did not take into account contingent liabilities that had already crystalised.

Maybank Kim Eng had previously in a report said that Malaysian debt market investors were well aware of the general level of debt, including the contingent liabilities.

A fund manager said that the weak overall macro-economic outlook was not contributing to the Malaysian debt situation, and that there was a global trade war brewing between the US and China.

“Malaysia is an open economy and the risk of a trade war could impact its trade surplus,” he said.

He said that the CDS was one of the indicators for investors to judge a country’s or company’s situation.

“It is not an important indicator, as there are other factors to look into such as trade numbers and Bank Negara reserves,” he added.

Malaysia’s CDS is lower than similar-dated Indonesian debt instruments, which is at 136 bps, but generally higher than similar instruments of the Philippines and Thailand.

However, the CDS of Malaysia has sped up since the May 9 GE.

Foreign funds have been paring down their holdings in Malaysian debt securities since April. According to official data, the outflow in April was at RM4.7bil, and accelerated in May by selling more than RM12bil post-election and in the unfavourable external environment.

The ringgit weakened beyond RM4 per dollar for the first time last week, the level last seen in January.

According to Bloomberg, Malaysia’s CDS performance since the GE on May 9 suggests investors see a decent chance of a ratings downgrade.

It said since the close of business on May 8, Malaysia’s CDS spread has widened by 30 bps compared to a change of six bps for Indonesia and the Philippines, which are both rated two notches lower on rating agencies Moody’s and S&P’s scales.

The news also pointed out that the deteriorating derivatives outlook has been mirrored by the portfolio outflows from Malaysia’s equity and bond markets.