Friday, June 19, 2009

Fitch Downgrade Malaysia's Debt - Consequences & Rationale

On June 10, 2009 Fitch downgraded Malaysia's long term local currency credit rating from A+ to A. However for Malaysia's outlook, it has upgraded it from negative to stable.
  • Rating agencies have voiced concerns about Malaysia's increasing fiscal deficit and impact on long-term yields. But bond issues have received a good response so far and policy rate cuts coming to an end is also a positive. Risks might be limited for investors as yields have improved and Malaysia has a sound external balance and forex reserve position
  • Fitch (June 10): Malaysia’s long-term local currency credit rating downgraded from 'A+' to 'A' and its outlook revised from negative to stable. This was led by high govt expenditures including two fiscal stimulus packages, falling govt revenues, slow tax reforms and rise in fiscal and primary deficits. But long-term foreign currency rating was maintained at 'A-' with a stable outlook
  • The downgrade is consistent with rating deterioration in some "AAA" countries like Japan and the UK. But it has little implication for Malaysia's fiscal deficit financing in the international market since debt can be financed domestically due to ample liquidity
  • S&P: Stimulus package would not affect Malaysia's A-minus foreign currency rating. Stable outlook as it has the capacity to pursue counter-cyclical fiscal policies. Malaysia will be able to fund large fiscal deficit entirely from domestic sources as they had done in the past due to its deep and liquid domestic capital markets
  • Moody's: 'A3' on high govt debt; S&P foreign-currency rating at 'A-' with a 'stable' outlook on strong external position and high savings rates
  • Rising Bond Issues:

  • Combined two stimulus plans so far would widen budget deficit to 7.6% of GDP in 2009 (the biggest since 1987) or even close to 10% of GDP. Govt. debt might increase to 46% of GDP in 2009 from 41% in 2008 (govt debt: 92.7% as domestic debt and 7.3% as foreign debt). While the first stimulus would be financed from the savings derived from cuts in the fuel subsidies, with the second stimulus and risk of rising deficit, the govt has decided to issue bonds starting January 2009 including foreign bond issues. The government raised RM60 billion from domestic debt sales in 2008 versus RM53 billion in 2007
  • From January to May 2009, total sales of government bond have surged by 79% y/y to RM 35billion. Central bank plans to hold 27 govt bond sales in 2009 incl. notes maturing in 3, 5, 10 and 20 years, and sell 5 billion ringgit in Islamic savings bonds
  • May 14, 2009 : Malaysia sold US$ 1.3billion (RM 4.5billion) of April 2014 notes at an average yield of 3.879%, which was higher than 3.735% at previous auction in March 2009 and 2.634% in January 2009
  • March 12, 2009 : Malaysia held the biggest debt auction in 5 yrs selling RM4.5bn ($1.21bn) of securities maturing in April 2014
  • Impact on yields curve: yield Demanded by investors has increased due to record government debt supply. Improved liquidity conditions and recent rate cuts to low levels and bond issues to finance the budget deficit have steepened the yield curve. However, rate cuts may have come to an end while bond issues will continue to flood the market ahead
  • Because of the sharp increase in bond supply in 2009 due to fiscal deficit, the MGS curve has gained in convexity. The curve is now extremely steep at the front end (3Y-5Y segment) and extremely flat at the long end (5Y-10Y segment). With the rate cut cycle having come to an end and given signs that economic activity may have bottomed, the outlook for MGS has become more bearish
  • Liquidity conditions remain supportive of the MGS while scope for a flattening of the curve is limited by upside risk to fiscal spending. Negative swap spreads (IRS-MGS) at the front end narrowed further in the past month on receding hopes of further rate cuts but near-term supply concerns could see the market anomaly persisting for longer
  • Malaysian government bonds are not attractive due to high debt supply and low possibility of further interest rate by central bank

p/s photos: Fiona Xie

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