PETALING JAYA: The appreciation of the ringgit against the US dollar, rising interest rate and redirection of funds are among the reasons that have triggered an increase in foreign buying of Malaysian Government Securities (MGS).
MIDF Research chief economist Anthony Dass said the strong ringgit against the greenback had whetted foreign investors' appetite for domestic assets, including bonds, at least for the short term.
We think investors are looking at safe haven instruments like the MGS which yields a lower credit risk compared with corporate bonds, he said.
Malaysian Rating Corp Bhd (MARC) chief economist Nor Zahidi Alias said the major contributing factor to increased capital flows into the region was because international investors were redirecting their funds away from the troubled G3 (the United States, Japan and the European Union) economies and focusing their investments on high-growth regions in Asia.
RAM Holdings Bhd economist Jason Fong said the differing regional growth prospects between the East Asian economies and the West was one of the causes of the rise in the foreign ownership in MGS as debt in the advanced economies were becoming increasingly risky.
Apart from that, he said the increasing interest rate differential would allow for significant carry trade, the ringgit's steady appreciation and the excess liquidity in the advanced economies were other factors contributing to the rise in foreign holdings.
Excess liquidity in the advanced economies; specifically programmes such as the recent Federal Reserve actions to increase domestic liquidity will push foreign investors to emerging markets (such as Asia) for greater returns.
The foreign ownership of MGS stood at 26.8% as at Sept 30, the highest level since the data was compiled in 2005.
In January this year, foreign investors bought a total of RM45.04bil of MGS and has been on an uptrend. As at Sept 30, foreign investors had a total of RM67.97bil of MGS, representing an significant increase of more than 50%.
In September 2009, a total of RM35.2bil of MGS were bought by foreign investors against RM67.97bil in September 2010.
At this juncture, we do not foresee the need for any drastic policy change since Malaysia's balance of payments position is quite healthy with inflows being somewhat offset by outflows, Zahidi said.
This was reflected by the increased investments by Malaysian corporations outside the country evidenced by the turnaround in the net International Investment Position (IIP) to RM120.1bil in 2009 (suggesting that external assets are greater than external liabilities), he said, adding that the net positive value in the IIP implied higher direct investment abroad with total assets amounting to RM275bil in 2009.
According to Fong, the amount of MGS issued had reverted back to its pre-crisis level in recent months. However, he said, as the economy began to develop in the post-crisis period, there would be an increase in the supply of public debt as the Government plans to facilitate the nation's long-term growth programme the Economic Transformation Programme.
Budget 2011, he said, had pencilled in an increase in net issuance of public debt of up to RM51bil in the following year.
It translates to an expected aggregate gross issuance size of around RM96bil in 2011; compared with RM61bil in 2009 and RM55bil year-to-date in 2010.
However, this expected increase in issuance is supported by significantly lower long-term yields and can be sustainable if Malaysia reverts back to or surpasses its long-term growth trend.
Asked if the flow of foreign money would be a concern, MIDF's Dass said it should be regarded as an endorsement by investors who were confident of the country's macro management policies and the strength of Malaysia's currency.
Also it translates into a lower liquidity risk in the event investors wish to liquidate their MGS exposure for any specific reason. It is also less volatile, he added.
Fong did not view the rise in foreign ownership as a serious concern but said instead that it would add liquidity to the local debt market.
In the long run, it will increase foreign investors' interest in the domestic economy. Also, increased foreign participation has lowered the cost of long-term public debt.
He said it was particularly evident among the 10-year tenured MGS where the yields had been steadily declining since the second quarter of this year, and would thus assist in the Government's funding needs.
Hot money flows do not pose the same threat they did prior to the Asian Financial Crisis; Bank Negara's reserves are currently at around eight times retained imports as opposed to 3.4 times in 1997.
This build-up of reserves is largely due to Malaysia's persistent trade surplus since 1997 and is indicative of Bank Negara's considerable ability to combat against a sudden outflow of capital, Fong said.
Asked if the Government should introduce tax to control the strong inflow, Dass said it might cause some knee-jerk reactions and be viewed negatively. It might dampen the appetite towards such safe haven instruments, he added.
Fong opined that an increase in capital controls through tax or other monetary or financial rules should only be employed if there was excessive capital coming into or out of the domestic economy.
Despite this, it is important to note that many Asian countries, which have imposed different forms of controls recently, have experienced a range of results. Thus, both the timing and method of controls are important considerations before implementing measures to stem foreign capital inflows, he said.
Zahidi said the current situation was within the comfort zone and the central bank had been sterilising the inflows, causing stability in the monetary policy stance.
Although the IMF has been suggesting such a measure, we do not see the need to address it at this juncture the way other countries such as Thailand and South Korea did, unless the inflows start to destabilise the financial market in Malaysia.
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