RHB Research expects the MYR bond market to remain supported as bond dynamics are healthy on the back of continued support from onshore real money investors and still compelling real yields. KUALA LUMPUR: Fitch Rating’s decision to downgrade Malaysia’s long-term foreign currency issuer default rating (IDR) to BBB+ from A- is unlikely to impact its financial markets on a sustained and significant basis, RHB Research said. It said on Monday the downgrade was unlikely to be followed by S&P and Moody’s in the next few months. “We believe, post the Covid-19 pandemic, Malaysia’s fiscal authorities are likely to engage in a comprehensive fiscal consolidation strategy. “Currently, based on our medium forecasts for GDP growth, inflation, interest rates, and exchange rates, we view Malaysia’s general government debt trajectory as sustainable, ” it said. RHB Research said while the 2019 general government debt/GDP ratio of 65.2% was higher than the median of 59.2% of Malaysia’s peers and was likely to rise in 2020 and potentially to some extent in 2021, importantly the trajectory of debt sustainability remains intact. Domestic and external liquidity conditions are likely to remain ample, the research house said, disagreeing with Fitch’s utilisation of “liquid assets and liquid liabilities” in its assessment of Malaysia’s external liquidity position since what is liquid and what is illiquid at different points of the business and market cycle are purely subjective in nature. The research house said the other metric Fitch focused on was domestic banks capital buffers and asset quality visibility. It found this strange since the ongoing changes in banking sector policy aren’t specific to Malaysia but also prevalent in other countries in the region. It also pointed out it was analytically improper for Fitch to use World Bank metrics to gauge governance in Malaysia’s policy making process as a major input in its rating model. “A more on the ground bottoms up approach to gauging the future prospects for governance and the impact on the policy making process in Malaysia is the correct methodology in our view, ” it said. RHB Research also found it odd about Fitch’s comment on potential capital outflows due to the even risk from Malaysia’s non-inclusion in a bond index and relative dependency on foreign financing. In the current environment, non-inclusion in a bond index while disappointing doesn’t necessarily lead to capital flight since countries’ ability to meet index requirements due to extraneous circumstances is well understood by investors. RHB Research expects the MYR bond market to remain supported as bond dynamics are healthy on the back of continued support from onshore real money investors and still compelling real yields. It also pointed out Malaysia’s low reliance on foreign debt. In 2Q, 2020, Fitch Ratings on April 9 and S&P on June 26 had revised the outlook on Malaysia’s sovereign ratings to Negative from Stable to reflect their assessment on additional downside risk to the government’s fiscal/debt metrics on back of a weaker economic backdrop from the Covid-19 pandemic and increased fiscal support. Despite the outlook revision in 2Q 2020, bond yields have held steady reinforcing the research house’s view that the MYR bond market will stay resilient. Malaysia’s foreign currency denominated debt/sukuk is relatively low with only just 2% of total sovereign debt/sukuk issued. “Typically, there will be a selloff in capital markets in both bonds and equities, given expectations that the country’s risk profile has increased. However, we believe any sell off will be limited and temporary. The impact on USD-MYR in the near-term will be temporary. Any retracement of USD-MYR to 4.10 will be short lived. Money managers have mandates in their portfolios which specifically mentions what bond ratings they are allowed to buy. As ratings go lower, risk profile increases and will have an impact on financial markets. “For the ringgit we believe the knee jerk reaction post Fitch downgrade would make the currency marginally weaker towards 4.100 before stabilizing around that level. “We believe ample liquidity conditions in the local financial system as well as monetary policy on an easing path will arrest excessive sell off in the bond, equity and FX markets, ” it said.
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