Falling crude prices are spurring outflows from Southeast Asia’s worst-performing emerging bond market as a drop in oil revenue adds to Malaysia’s debt burden.
Ringgit-denominated notes returned 1 percent in the past three months, trailing gains of 5.6 percent for Indonesian securities, 4.6 percent in Thailand and 3.3 percent for the Philippines, according to Bloomberg indexes. In the past week, Malaysia’s debt lost 0.1 percent. Overseas investors pulled a combined $1.7 billion from the nation’s sovereign bonds in September and August, the latest available data shows, while adding to holdings of rupiah and baht securities.
The 30 percent slump in crude since June will make it harder for Prime Minister Najib Razak to cut the budget deficit as oil-related industries account for a third ofstate revenue. Bank of America Merrill Lynch says should the cost of the commodity stay at current levels, there’s a “high” probability the government will miss its target of reducing the shortfall to 3 percent of gross domestic product next year from 3.5 percent.
“Malaysia is the region’s big loser from the sharp decline in oil prices,” Nicholas Spiro, London-based managing director at Spiro Sovereign Strategy and a former consultant at Medley Global Advisors LLC, said in a Nov. 19 e-mail interview. “If prices stay where they are or keep falling, this will undermine fiscal credibility at a time when there are already growing concerns about the build-up of debt.”
Net Exporter
Malaysia is more vulnerable than some of its Southeast Asian neighbors to falling crude prices as it’s a net exporter of the fuel. The nation’s current-account surplus, the broadest measure of trade, shrank to 7.6 billion ringgit ($2.3 billion) in the third quarter, the least since June 2013.
The government has run a fiscal deficit since 1998 and seen its debt as a proportion of GDP reach 52.8 percent, near the self-imposed 55 percent limit. That’s not prevented the cost of insuring the nation’s bonds from falling.
Five-year credit-default swaps have dropped 45 basis points, or 0.45 percentage point, to 86.7 from this year’s high in February, CMA prices show. That compares with 144 for Indonesia, 92 in the Philippines and 86 for Thailand.
Brent crude has fallen to $76.29 a barrel since reaching a nine-month high of $107.73 in June. The price of Tapis, or Asia’s benchmark grade, was trading at $79.97, down 33 percent from 2014’s peak on June 20. The Malaysian government has based its 2015 revenue projection on $105.
Malaysia is more vulnerable than some of its Southeast Asian neighbors to falling crude prices as it’s a net exporter of the fuel. The nation’s current-account surplus, the broadest measure of trade, shrank to 7.6 billion ringgit ($2.3 billion) in the third quarter, the least since June 2013.
The government has run a fiscal deficit since 1998 and seen its debt as a proportion of GDP reach 52.8 percent, near the self-imposed 55 percent limit. That’s not prevented the cost of insuring the nation’s bonds from falling.
Five-year credit-default swaps have dropped 45 basis points, or 0.45 percentage point, to 86.7 from this year’s high in February, CMA prices show. That compares with 144 for Indonesia, 92 in the Philippines and 86 for Thailand.
Brent crude has fallen to $76.29 a barrel since reaching a nine-month high of $107.73 in June. The price of Tapis, or Asia’s benchmark grade, was trading at $79.97, down 33 percent from 2014’s peak on June 20. The Malaysian government has based its 2015 revenue projection on $105.
‘Poor Returns’
Each 10 percent decline in crude will worsen Malaysia’s fiscal shortfall by 0.2 percent of GDP, Chua Hak Bin, a Bank of America economist in Singapore, wrote in an Oct. 22 report. In contrast, Indonesia would benefit as a net importer and see savings of 0.4 percent of GDP, according to the report.
“Poor returns from Malaysian government bonds in recent months have highlighted the problems Malaysia could face in attracting investors next year,” Anders Faergemann, who helps oversee $4.3 billion of emerging-market debt as seniorfund manager in London at PineBridge Investments, said in a Nov. 19 e-mail. “Speculation Malaysia could register a current-account deficit in the fourth quarter, its first since 1997, is weighing heavily on investor sentiment.”
The yield on Malaysia’s 10-year sovereign debt climbed 11 basis points in the past month to 3.91 percent, near the highest since Sept. 29, data compiled by Bloomberg show. That compares with a 21 basis point drop in yield to 7.83 percent for similar-maturity Indonesian debt and a two basis point decline in Thai securities to 3.21 percent.
The ringgit is losing support amid the drop in oil prices, the narrowing current-account surplus and as analysts push back bets for an interest-rate increase.
No Beneficiary
The currency has weakened 6.1 percent since end-August, the biggest drop among Southeast Asian currencies. The ringgit reached 3.3681 per dollar yesterday, the lowest level since March 2010.
Overseas investors cut holdings of Malaysian government debt, excluding bills, in September and August to 154 billion ringgit, the lowest in four months, central bank data show. They added $2.4 billion of rupiah notes and $922 million of baht securities in those two months, according to finance ministry and central bank data.
“Clearly, Malaysia’s current account will not be a big beneficiary from the oil-price drop,” Manu George, Asian fixed-income investment director at Schroders Investment Management (Singapore) Ltd., said in a Nov. 18 e-mail. “Global funds are selling Malaysian debt as the yields on offer are not as attractive. Yet Indonesia still offers very attractive yields.”
Eroding Value
Exports of Malaysian crude petroleum decreased 9 percent in September from a year earlier to 2.95 billion ringgit, the first decline in six months, according a Nov. 7 government report.
Fitch Ratings cut the outlook on Malaysia’s A- credit ranking to negative from stable in July last year on concern that the nation’s public finances could worsen. Najib said in an Oct. 10 budget speech that he’s “committed” to cutting the fiscal deficit to 3.5 percent this year from 3.9 percent in 2013 and balance the budget by 2020.
“Falling oil prices reduce the trade surplus, which negatively impacts the ringgit,” Angus Salim Amran, the Kuala Lumpur-based head of financial markets at RHB Investment Bank Bhd., a unit of RHB Capital Bhd., said in a Nov. 18 e-mail. “This erodes the value of foreigners’ holdings of Malaysian government bonds.”
To contact the reporter on this story: Liau Y-Sing in Kuala Lumpur atyliau@bloomberg.net
To contact the editors responsible for this story: Sandy Hendry atshendry@bloomberg.net Simon Harvey
