Outlook upgrade a win for bonds


Centre for Market Education (CME) chief executive officer Carmelo Ferlito said the new outlook by S&P Global Ratings may ease the bond sell-off. “But, again, this (upgrade) would create more debt, which means more instability and more inflation,” he told StarBiz.

PETALING JAYA: For the Malaysian bond market, which has suffered a deep sell-off in the first half of June, the recent upgrade of the country’s credit ratings outlook is a timely boost to sentiment.

It remains to be seen how significant the impact of the upgrade would be, but the market has in general welcomed S&P Global Ratings’ move to revise Malaysia’s outlook to “stable”.

The revision comes after two years of negative outlook that had been in place since June 2020 at the height of the pandemic.

The upgrade, which some termed as a positive surprise, was announced at a time when investors were spooked by an acceleration in the inflation print globally and an aggressive interest rate hike in the United States to tame inflation.

The expectations of a further interest rate hike – and better returns – in the United States have caused investors to pull their monies out of Malaysia.

Foreign inflows did make a comeback in May – albeit a small one – for the local bond market at half-a-billion ringgit, after two successive months of net foreign selling.

The bond market also started with a rally in the morning, but this was short-lived as the selling mode started in the afternoon session and erased the gains. “Most probably due to foreign selling in view of global volatility,” AmBank Group chief economist Anthony Dass told StarBiz.The bond market also started with a rally in the morning, but this was short-lived as the selling mode started in the afternoon session and erased the gains. “Most probably due to foreign selling in view of global volatility,” AmBank Group chief economist Anthony Dass told StarBiz.

The inflows, however, were short-lived as foreign investors turned net sellers in the first half of June this year.

Nevertheless, the latest upgrade in the sovereign outlook by S&P could help in bringing some of these investors back into Malaysia.

Centre for Market Education (CME) chief executive officer Carmelo Ferlito said the new outlook by S&P Global Ratings may ease the bond sell-off.

“But, again, this (upgrade) would create more debt, which means more instability and more inflation,” he told StarBiz.

According to RHB Bank head of fixed income strategy Fakrizzaki Ghazali, the outlook upgrade is positive for the Malaysian Government Securities (MGS) market.

“S&P’s upgrade on Malaysia’s outlook back to stable (from negative) has removed rating risk uncertainties and will spur positive sentiment in the market,” he said in a note yesterday.

Hong Leong Fixed Income and Economic Research also described the outlook upgrade as a fresh catalyst for local bonds.

“Expect local govies to trade on a more biddish note following the positive vibes from S&P’s upgrade,” it said in a note.

AmBank Research said the upward outlook revision was a surprise and that it should lead to some positive reaction from the local bond and equity markets.

According to RHB Bank head of fixed income strategy Fakrizzaki Ghazali, the outlook upgrade is positive for the Malaysian Government Securities (MGS) market. “S&P’s upgrade on Malaysia’s outlook back to stable (from negative) has removed rating risk uncertainties and will spur positive sentiment in the market,” he said in a note yesterday.HongAccording to RHB Bank head of fixed income strategy Fakrizzaki Ghazali, the outlook upgrade is positive for the Malaysian Government Securities (MGS) market. “S&P’s upgrade on Malaysia’s outlook back to stable (from negative) has removed rating risk uncertainties and will spur positive sentiment in the market,” he said in a note yesterday.Hong

In line with the research house’s expectation, the stock market’s benchmark index jumped by 16.62 points or 1.16% yesterday to 1,454.74 points.

The bond market also started with a rally in the morning, but this was short-lived as the selling mode started in the afternoon session and erased the gains

“Most probably due to foreign selling in view of global volatility,” AmBank Group chief economist Anthony Dass told StarBiz.

Looking ahead, CIMB Treasury and Markets Research said the Malaysian bond market would receive mild support from S&P’s affirming its A- sovereign credit rating on Malaysia, while upgrading the outlook to “stable”.

The research house also expects the outlook upgrade to provide a boost to another upbeat 30-year MGS auction on June 29.

“This is the second time the MGS maturing June 2050 is reopened this year, and the third 30-year auction after the new issuance of the 30-year Malaysian Government Investment Issue held last month.

“The auction follows on the heels of recent news that the government will foot a higher subsidy bill this year, comprising energy and food subsidies as well as welfare and cash assistance, amounting to RM77.3bil,” it said.

CIMB Treasury and Markets Research noted that S&P had downgraded Malaysia’s outlook to “negative” in June 2020 due to concerns on Malaysia’s fiscal metrics ahead of expected high government spending to tackle Covid-19.

With the recent upgrade by S&P, it is noteworthy that the Big Three rating firms – including Fitch and Moody’s – have assigned a “stable” long-term outlook on Malaysia.

In its last review in July 2021, Fitch reaffirmed its rating of BBB+ on Malaysia, while Moody’s maintained its A3 ratings on the country in September 2021.

S&P, on the other hand, had reaffirmed its A- rating on Malaysia on June 27.

In a note yesterday, Maybank IBG Research explained that S&P’s recent outlook revision was likely driven by an upgrade of S&P assessment on Malaysia’s economic profile to a score that is higher than pre-Covid-19 levels.

This allows a larger debt capacity with the same A rating.

“Previously S&P assessed an economic score of “4” for Malaysia based on the initial assessment using GDP per capita, but now it assigns a higher economic score of “3”, citing “real GDP per capita trend growth above the median of sovereigns in the same rating category”.

“We believe the higher economic score has lifted the overall institutional and economic profile of Malaysia in the rating matrix, allowing a greater debt headroom for the same A- rating.

“This is expected to reduce Malaysia’s rating sensitivity to government indebtedness and fiscal performance going forward, and probably explains why both “net indebtedness” and “change in net general government debt” no longer feature as key downside triggers,” according to the research house.

Maybank IBG Research, however, opined that the outlook upgrade by S&P would not have a major impact on ringgit bonds or foreign exchange.

“Sentiment in the local bond market is still dominated by global inflation and rates drivers.

“We maintain a mildly bullish outlook on MGS,” it said.

Meanwhile, CME’s Ferlito said that S&P has presented a scenario which was “quite far from the reality” in its latest assessment of Malaysia.

He argued that ratings agencies like S&P are fixated on gross domestic product performance per se, without looking at how the economic performance is achieved.

“In the case of Malaysia, we may have experienced growth, but this growth is pulled by private consumption and government spending, which means it is far from being sustainable, it is based on debt (both private and public) and inflation.

“I am surprised at how they stop at the surface without looking at the consequences that a certain growth model brings along.

“If GDP would fall because of a cut in government spending, I would be happy with a negative growth,” said Ferlito.

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