OPR likely to remain at 3% into next year

THE major move noted in the week was the weakening of the ringgit.

The US dollar/ringgit pair moved above the 4.7500 psychological level and rose further to hover near the 4.780 level.

The driving factor for the rise in US dollar/ringgit was due to the sustained strength of the US dollar.

In turn, the boost to the US dollar was two-pronged.

On one side is the boost to safe-haven demand in the dollar in view of the Middle East geopolitical risks.

On the other side is the continued worries over the possibility of another US Federal Reserve (Fed) interest rate hike this year, and that the Fed would go ahead to sustain a “higher-for-longer” interest rate regime in the longer term.

The US dollar index sustained above the 106 level compared with levels near 105 last month, and below 102 in July.

The higher US interest rates translated into higher returns on US dollar assets.

At the same time, our expectation is that Malaysian interest rates will sustain into the longer term as we expect Bank Negara to maintain the current overnight policy rate (OPR) at 3.00% well into next year.

We anticipate Bank Negara to prevail with an accommodative level of the OPR to support domestic demand in view of declining external trades.

However, the risk to the OPR outlook, in the longer term, hinges on how inflation will pan out given the impending subsidy rationalisation measures of Budget 2024.

Assuming the Fed does introduce another interest rate hike before the end of this year, the upper bound of federal funds rate (FFR) target will rise to 5.75%.

This translates into the spread between US rates and Malaysia rates to move wider to 275 basis points (bps).

The spread was down 25 bps at the start of 2022, before the Fed began to hike the FFR by 500 bps in the rest of 2022 and so far in 2023.

Meanwhile, recent economic data in Malaysia has been disappointing.

The latest release was Malaysia’s total trade in September 2023 declined by 12.6% year-on-year (y-o-y) (August 2023: down 19.9% y-o-y) to RM224.4bil, with exports falling by 13.7% y-o-y (August 2023: down 18.7%) to RM124.5bil and imports declined by 11.1% y-o-y (August 2023: down 21.2% y-o-y) to RM100bil.

In another release a week prior, Malaysia’s industrial production declined by 0.3% in August from a growth of 0.7% in July 2023.

Sector-wise, the manufacturing sector contracted by 0.6%, while production in the mining sector increased by 0.1%, and electricity production accelerated to 1.9%.

As for the budget announcement, 2024 will see the fiscal deficit to gross domestic product (GDP) ratio narrow further to 4.3% on the back of RM85.4bil budget shortfall, from 5% in 2023.

The budget has set the tone towards Malaysia’s long-term fiscal consolidation journey, at 3% to 3.5% target under the 12th Malaysia Plan (12MP) 2021 to 2025.

Against the backdrop of RM85.4bil fiscal deficit expected in 2024 and incoming maturity of RM93bil, we see MGS+GII issuance in the range of RM170bil to RM180bil (2023: RM186bil).

The expected range takes into account maturing Sukuk Perumahan Kerajaan (SPK) securities in 2024 to the tune of RM5.5bil.

Any upside surprise to this estimate could come from unexpected spike in commodity prices, which could cause subsidy bills to be higher particularly on food-related subsidies to ease the burden of the rakyat.

With the RM90bil development expenditure, as well as National Energy Transition Roadmap and the New Industrial Master Plan, we hope that big-ticket infrastructure and utilities projects will roll out in 2024 and beyond.

At this juncture, we expect ringgit corporate bond issuance to be in the range of RM100bil to RM110bil – slightly below the past five-year average of RM119.6bil.

A closer look at corporate bond maturity profile for 2024 showed that RM69.6bil will be redeemed.

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