Malaysia: BNM needs to respond to concerns over fiscal deficit

  • Malaysian bonds are starting to show some concern about the nation’s rising fiscal deficit. It may be time for the central bank to respond.
  • The nation’s 10-year yield briefly climbed above 3% this week, from as low as 2.79% in May 20, after the authorities pledged to pump in another MYR35bn to counter the impact of Covid-19. That’s on the top of the MYR260bn announced earlier. The government is now forecasting the fiscal deficit to widen to 5.8% to 6% of gross domestic product, the most in a decade.
  • Demand for bonds by domestic investors was lacklustre even before the latest round of stimulus was announced on 5 Jun 20. Total bids at an auction of three-year Islamic debt on 3 Jun only just scraped in above the amount on offer, compared with a bid-to-cover ratio of more than three times at a similar sale of 10-year Islamic securities in Apr 20.
  • The prospect of further interest-rate cuts may revive demand for local bonds, but the market is not pricing in a full 25 basis-point move at any point in 3Q20, according to swaps data compiled by Bloomberg.
  • There’s something else the central bank could do though to revive local interest.
  • While policy makers have already lowered the reserve requirement ratio for local banks by 100 basis points to 2% and included bonds as reserve-compliant assets, there is room to go further.
  • Of course, Malaysian policy makers can point to a number of other factors that will help support the bond market even without their intervention. The recent doubling of Brent crude to around USD40 per barrel will be positive for the nation’s budgetary position, while muted inflationary pressures will continue to underpin real yields.
  • In the near term though, it’s likely Malaysian bonds will remain under pressure unless the central bank takes further steps to shore up demand.

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