Higher issuance of govt bonds seen this year


  • Corporate News
  • Tuesday, 31 Mar 2020

“Our estimates show that the government can incur a fiscal deficit of up to 6.4% in 2020, from 3.4% in 2019 in order to hit the debt limit of 55% of GDP, ” he said. Bank Islam's Mohd Afzanizam(pic)

PETALING JAYA: With the country’s fiscal deficit being further hammered from the coronavirus (Covid-19) pandemic and falling global crude oil prices, higher issuance of between RM130bil and RM150bil of government bonds is anticipated for the year.

The issuance of government bonds (Malaysian Government Securities (MGS) and Government Investment Issues (GII)) is expected to be higher than that of RMRM118.6bil registered last year as the government seeks more funds to finance the higher projected deficit.

On the other hand, corporate bond issuance according to economists and fixed income analysts may see a dip compared to last year. Malaysia’s fiscal deficit to gross domestic product (GDP) last year stood at 3.4%.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid told StarBiz that in view of higher fiscal deficit this year, he foresees more MGS and GII issuance in the pipeline.

The lLower overnight policy rate (OPR) and statutory reserve requirement (SRR) would certainly make the environment more conducive for the government to issue more marketable securities, he said.

Long term investors, he said, especially the pension funds, insurance companies and asset managers, would want to place more money into the risk-free assets during heightened uncertainties.

“It really depends on how much the second fiscal stimulus package is going to be like, especially the actual expenditure that will come out from the government coffers. The first round, it was pegged at RM3.5bil.

“At that level, we are probably looking MGS/GII issuance of around RM126bil which is already higher than RM118.6bil in 2019.

“Probably, now we are looking in the region of RM130bil to RM150bil for MGS and GII issuance. But this will really depend on the size of the second stimulus package, ” he said.

He added that there was ample space for the government currently to spend.

As of 2019, he said the outstanding amount of these instruments (MGS, GII and Malaysian Islamic Treasury Bills (MITB) remained low at 48.7% of gross domestic product (GDP).

“This suggests that the government still has some fiscal space to spend.

“Our estimates show that the government can incur a fiscal deficit of up to 6.4% in 2020, from 3.4% in 2019 in order to hit the debt limit of 55% of GDP, ” he said.

The statutory debt limit of 55% of GDP under the relevant acts is confined to only MGS, GII and MITB.

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias(pic above) said given the likelihood of an economic downturn in 2020 and the extension of the movement control order (MCO), total corporate issuance would likely dip slightly when compared to last year.

This is not surprising as corporate bond issuance generally rise or fall in tandem with economic performance, he said, noting that government bond issuance, however, would likely increase as the government needs to finance higher fiscal deficits.

However, Zahidi said the current low interest rate environment and the accommodative policy by Bank Negara would to some extent prevent corporate bond issuance from falling too significantly.

As the global Covid-19 persists and global crude oil prices fall, the government’s fiscal deficit would increase. Under this scenario, he expects to see more MGS/GII issuance from the government.

Zahidi expects the total gross issuance of corporate bonds for this year to be around RM95bil to RM105bil, adding that he anticipates total gross issuance of MGS/GII to be in the region of RM140bil to RM150bil given the expected increase in fiscal deficit to support the economy amid the pandemic.

For corporate bonds, Winson Phoon, head of fixed income research at Maybank Kim Eng said he is revising down his forecast to RM80bil from RM110bil previously. Private investments would be affected by the current uncertainties, which in turn would weigh on fund raising activities, he noted.

On the MGS yields, he said: “Local bonds are facing near-term challenges e.g. a very volatile global financial market, foreign outflow and rating risks.

“If the Covid-19 shock pulls the global economy down into a deeper recession, risk-off sentiment may persist.

“But once we are through all these, though it is hard to tell when, MGS yields should have the opportunity to retrace lower as investors shift their focus back to the central bank’s monetary easing, and in this case I think it is not impossible for 10-year MGS yield to re-test the 3.00% threshold by year-end, ” he said.

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