MARC Ratings Bhd chief economist Firdaos Rosli said: “Although there is a slight slowdown in issuances of late, it was nothing extraordinary for now. With the government’s desire to maintain economic growth targets, the local bond market may not be ominous, albeit it is recognised that interest rates and bonds have an inverse relationship.”
PETALING JAYA: The ringgit bond market is unlikely to see a slowdown in government bond issuances due to the country’s budget needs but corporate debt issues may see a slight drop amid rising interest rates.
MARC Ratings Bhd chief economist Firdaos Rosli said: “Although there is a slight slowdown in issuances of late, it was nothing extraordinary for now. With the government’s desire to maintain economic growth targets, the local bond market may not be ominous, albeit it is recognised that interest rates and bonds have an inverse relationship.”
MARC had envisaged the Malaysian government securities (MGS) and Government Investment Issue (GII) issuances to remain between its projected range of RM170bil to RM180bil for 2022, while corporate bond issuances are expected to come in at the lower end of the rating agency’s projected range of RM100bil to RM110bil for the year.
RAM Rating Services Bhd expects its projections for 2022 to remain on track, with MGS and GII issuances to be around RM165bil to RM175bil, while corporate bond issuances to linger around RM110bil to RM120bil..
The government issued RM163.9bil of debt in the local market in 2021 while corporate bonds issuance amounted to RM114.3bil.
On corporate bonds, Firdaos said issuances were likely to moderate amid the less conducive capital-raising environment.
“However, as Malaysia’s economic recovery remains on track, along with the revival of some infrastructure projects, we do not foresee a significant drop in issuances this year,” he said.
RAM’s senior economist Woon Khai Jhek did not expect higher interest rates to significantly reduce the quantum of corporate issuance this year.
“However, the anticipation of higher future rates may propel issuers to bring forward their funding plans to lock in lower rates,” Woon said.
With the resumption of economic activities, he said there would be an increasing need for funding by businesses.
According to Woon, the two sectors that dominate corporate bonds issuance – financial services and infrastructure and utilities sectors – will continue to augment their capital base for increased lending and to roll out various infrastructure projects, respectively.
On MGS and GII issues, the analysts said the high subsidy bill and rising budget deficit would ensure that the government remains active in the debit market.
Bank Negara had raised the overnight policy rate (OPR) by a total of 50 basis points (bps) to 2.25% this year, while the US Federal Reserves (Fed) raised by 150 bps, with an additional 175 bps projected for the rest of the year.
With more rate hikes anticipated for the second half of this year, Firdaos believed that the local bond yields have room to go higher.
“While there could be renewed turbulence, we believe the rise in government bond yields would not be too significant given the critical support from local institutional investors,” he said.
Meanwhile, Woon said foreign investor interest in the local debt is expected to be weak in the near term owing to the broad market sell-off triggered by the Fed’s aggressive policy tightening.
“This is compounded by the narrowing yield differential between the MGS and US Treasuries which dampens the attractiveness of domestic bonds,” Woon said, adding bond yields are expected to remain pressured on the upside amid the monetary policy tightening globally and domestically.
Commenting on the quality of debt, Woon said the market preference for highly rated bonds is largely due to the demand dynamics in Malaysia.
“A large share of fixed-income investors in Malaysia are financial institutions and insurance firms that generally have low risk appetite due to their investment mandates and restrictions,” he said.
In addition, Firdaos said it would be more challenging for lower-rated issuers to tap into the bond market, given the higher financing cost. Both of the analysts, however, did not foresee any significant increase in bond defaults.
It is to note that there was no corporate bond default in 2021.
Did companies take advantage of low rates, before the hike in OPR?
Corporate bond issuances in 2021 was 9.28% higher year-on-year at RM114bil, due to relatively low yields.
As of the end of June, the total corporate bond issuance amounted to RM52.5bil, while MGS and GII issuances summed to RM87.5bil.
Global corporate debt fell for the first time in eight years as higher interest rates led companies to stop issuing new bonds while the prospects of higher rates had seen many opting to repay debt with internal cash flows to ease charges from higher rates.
If the trend of repayment over refinancing continues, net debt may fall even further.
