As Bank Negara Malaysia (BNM) continued to ease hedging rules traders wondered if Malaysian assets were coming back on the radar screens of international fund managers following capital outflows when policy makers clamped down on offshore trading of the Ringgit.
On April 13, the Financial Markets Committee (FMC - which comprises members from BNM and key industry players) and BNM announced a series of initiatives to promote a fair and effective financial market, improve bond market liquidity, ease hedging activities as well as enhance transparency and market information.
While the capital markets regulator, the Securities Commission Malaysia (SC) simultaneously announced that it would permit short selling of corporate bonds to boost bond market liquidity and issued a set of guidelines effective April 13 for short-selling activities.
With the new Guidelines on Regulated Short Selling of Corporate Bonds (Guidelines), Principal Dealers are now permitted to conduct regulated short selling of corporate bonds, expanding the range of bonds that can be short sold.
The Guidelines aim to provide certainty as to the parties who would be permitted to conduct short selling of corporate bonds as well as the specific requirements involved. Recognising the importance of ensuring market stability, conditions on how regulated short selling of corporate bonds can be conducted have also been put in place.
This latest initiative is part of the SC’s continuous efforts towards enhancing the liquidity of the secondary bond market while ensuring a comprehensive and facilitative infrastructure and regulatory framework. This is in line with the SC’s on-going commitment towards sustaining the overall development and growth of Malaysia’s bond market.
Short selling liberalised
To improve liquidity in the bond market, the FMC and BNM announced that the regulated short-selling framework will be liberalised to allow all residents to participate in short-selling activities. This initiative will enable access to risk management tools, add liquidity to the bond market and facilitate a better price discovery process for resident investors.
More measures were announced to facilitate a more effective avenue for the hedging of interest rate risk exposures as well as to generate more trading activities and liquidity in the secondary government bond market.
To elevate liquidity in the Malaysian Government Investment Issues (MGII) and narrow the pricing gap between Malaysian Government Securities (MGS) and MGII, the eligible securities for short-selling transaction will be expanded to include MGII with an outstanding nominal amount of at least RM2 billion. The eligibility criteria are similar to the current framework for MGS.
Following feedback from financial market players, the existing passive and dynamic hedging flexibilities will be simplified and streamlined whereby registered investors will be allowed to fully hedge and actively manage their exposures including unwinding of hedging positions. Registered non-bank entities will be allowed to hedge up to 100% of their underlying assets as well as to manage an additional 25% of forex exposure.
In addition, flexibility is given for residents to actively manage their forex risk exposure up to an aggregate net open position limit of RM6 million per client per bank.
Meantime Bloomberg reported recently that Malaysian assets are coming back onto the radar for global funds after they fled last November when policy makers clamped down on trading in offshore non-deliverable Ringgit forwards (NDFs) to halt a slide in the currency.
Neuberger Berman Group LLC said the Ringgit may be among the region’s better performers in coming months, while an improving economy has convinced Nikko Asset Management Co to change its view of Malaysian bonds to “neutral” after earlier cutting holdings.
“The Ringgit has a few things going for it now,” Prashant Singh, Neuberger’s senior portfolio manager for emerging market debt, said in an interview with Bloomberg in Singapore recently.
“If you look at the overall balance of payments, with the increase in commodity prices, the current account has improved. Foreign direct investment in Malaysia has improved so that has helped.”
While still expecting the ringgit to weaken along with most Asian currencies against the dollar, analysts have boosted forecasts for three straight months.
While the Ringgit was the worst performer of 11 Asian currencies in 2016, the Ringgit has since appreciated and is currently trading at RM 4.26 per dollar*.
BNM responded to the Ringgit’s slump in November by clamping down on the trading of offshore non-deliverable forwards. That had the effect of stemming declines, but also damped interest from overseas investors as they found it harder to hedge their positions in the country’s assets.
While global funds have cut holdings of ringgit bonds to a five-year low, sentiment is starting to improve as the focus shifts to the nation’s improving current-account surplus and trade outlook.
As crude prices recover and the global economy stabilises, the outlook for the net oil exporter has brightened and its current-account surplus widened to the most in more than two years in the last quarter of 2016. Prime Minister, Dato' Sri Mohd Najib Tun Abdul Razak, aims to shrink the budget deficit for an eighth year, with the shortfall expected to fall to 3% of gross domestic product, from 3.1% in 2016, Bloomberg said.
The improving outlook is cause for optimism for Nikko Asset. The Tokyo-based fund-management company is neutral on Malaysian bonds after reducing its exposure following the central bank’s clampdown on non-deliverable forwards.
“From a bond investor’s perspective, the budget is consolidating and fundamentals are decent,” said Edward Ng, a fixed-income portfolio manager in Singapore at Nikko Asset, which oversees about US$171 billion.
BNM is also trying to revive interest in its financial markets. In December, they revised rules to encourage investors to hedge their currency exposure onshore and ordered exporters to hold at least 75% of export proceeds in ringgit, Bloomberg said.
“The new rule which forces exporters to convert at least 75% of their export revenues into Ringgit definitely helps,” Neuberger’s Singh said. “That has alleviated some of the outflow pressure on the balance of payments.”
Earlier, in March, the FMC said that the Malaysian bond market continues to grow with the current outstanding value at RM1.2 trillion or 90% of GDP and an average annual growth rate of 10.5% for the past ten years.
In 2017, a net bond issuance of RM80 billion is expected. The size of Malaysia’s bond market relative to GDP remains the largest in Southeast Asia and the third largest in Asia. There is also a diverse range of investors in the Malaysian bond market comprising pension funds, asset management companies, banks, insurance companies and non-resident (NR) investors.
It added that with the presence of domestic investors and active market makig initiatives by a number of principal dealers supported by the Financial Markets Association Malaysia, the secondary market liquidity has improved. The spreads between the buying and selling quotes for bonds are now relatively narrower at 20 to 50 sen compared to the peak of RM2 during the low liquidity period post US elections.
Non-resident holdings in bond market gradually declining
Also, FMC said that in 2016, NR holdings of bonds peaked at 34.7% and have been declining (post the US election and post NDF measures by the Bank) to 28.7% as at end February 2017.
“The sell-down was largely from shorter term papers which are mainly attributed to unwinding of NDF positions by NR financial institution investors. NR holdings of less than three years maturity reduced by RM15.2 billion from November 2016 to-date, comprising 70 per cent of the reduction in NR holdings of government bonds.”
BNM shared that further granular data showed that, of these short term papers, the bulk of the reduction in NR holdings was in less than one-year maturities. “This type of short-term flows has been destabilising particularly when it reacts to global and regional developments,” the FMC said.
Nevertheless, the FMC said that the market is able to withstand and absorb the changes in the short-term NR holdings. This was evidenced by well-supported Government securities auctions which recorded strong average bid-to-cover ratio of 2.5 times in 2017, which was above the 2-year average of 2.3 times. Secondary bond market yields have also recovered about 43% from its peak in November 2016.
The FMC said that a roundtable also discussed whether such investors or flows would return to the Malaysia’s bond market. Given that the bulk of these fund flows were driven by short-term arbitrage that capitalised on the NDF market, a recurrence would be unlikely. In the future, the level of participation of NR investors could thus settle at a lower but more stable level.
The FMC also made available Presentation Slides on the Roundtable Discussion on Bond Market Development.
*US$1 = RM 4.26, as of 15th June 2017