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Tuesday, June 19, 2018

Untactful disclosure by Finance Ministry driving off fund managers, creates uncertainly

FUND managers are cutting their holdings in Malaysian bonds due to uncertainty over the magnitude of losses that have been uncovered in the scandal-ridden 1Malaysia Development Bhd (1MDB) probe, said Bloomberg.

The escalating 1MDB controversy, the removal of the goods and services tax, and the disclosure that Malaysia is in debt up to RM1 trillion – almost 60% more than what the previous government had declared – have convinced even fans of the country’s bonds to scale back, it said.

“Uncertainty over how the fiscal deficit will pan out will overhang,” said Wilfred Wee, a fund manager in Singapore at Investec Asset Management Ltd., which oversees US$146 billion (RM600 billion).

“Until the dust settles, we have reduced our still overweight exposure to Malaysia, recognising that Malaysia’s current account and overall fundamentals remain by and large still attractive versus peers,” he told Bloomberg.

Rating agencies are also likely to downgrade Malaysia sooner rather than later if its fiscal health deteriorates significantly due to liabilities arising from 1MDB, Brown Brothers Harriman said in a report this month.

“We hold a cautious view on Malaysia due to fiscal and political uncertainty, potential negative ratings action and uninspiring valuations,” said Roland Mieth, emerging markets portfolio manager in Singapore at Pacific Investment Management Co., which oversees US$1.77 trillion.

"The replacement of GST with service and sales taxes adds uncertainty to Malaysia’s fiscal trajectory.”

Former prime minister Najib Razak had set up 1MDB in 2009 as a vehicle to drive investment into Malaysia and boost its assets abroad.

However, the fund soon fell into deep debt amid allegations that it was being used to embezzle and launder state funds.

Since Pakatan Harapan’s shock election victory last month, new Finance Minister Lim Guan Eng has revealed that government debt and liabilities had jumped to RM1.087 trillion, inflated by state guarantees for borrowing at 1MDB.

Last year, the Finance Ministry had stated that federal debt was RM685 billion.

Markets were spooked by the disclosure, with the ringgit sliding to a five-month low and global funds sold almost RM10 billion ringgit of Malaysia’s sovereign debt in May, the most since March 2017, said Bloomberg.

However, according to GAM (UK) Ltd, concerns about the country’s worsening debt levels are overdone.

The government remains on track to meet its 2018 budget deficit target of 2.8% of GDP and the economy is growing fast enough to ensure the debt-to-GDP ratio will gradually decline, said Michael Biggs, emerging-market fixed-income investment manager in London at GAM, which oversees the equivalent of  US$165 billion.

“We have a modest overweight on Malaysian government bonds,” he said.

“Inflation has remained contained, Malaysia’s balance of payments appear solid, foreign reserves are rising, and both real and nominal yields are at attractive levels.”

BNY Mellon Investment Management also believes bond supply may need to increase to compensate for a decline in revenue caused by the removal of the goods and services tax.

“We would prefer to not be heavily exposed to Malaysian bonds until the fiscal uncertainty abates,” Aninda Mitra, senior sovereign analyst at the company in Singapore, told Bloomberg.

“On many metrics the ringgit remains a relatively cheap currency to own.

“But, we are likely to see a prolonged tussle between policy uncertainty and a broader loss of confidence, which could overwhelm any lingering perception of value.” – June 18, 2018.

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