Malaysia's move to free up trading in its currency is a compromise between appeasing foreign investors and curbing hot money flows, but the changes might not be enough to immediately woo back players who had ditched the ringgit in recent years.
Last week's announcement by the central bank was an attempt to roll back some of the draconian restrictions it imposed in 2016 to stem a currency rout. They were also aimed at appeasing FTSE Russell as the global index provider reviews Malaysia's participation in its world bond index. "FTSE Russell places a lot of focus on liquidity ... it seems to be now addressed. But it's hard to tell if that will be enough, because at the end of the day they're going to go around the world asking different centres of investors for feedback," said Ng Kheng Siang, Asia Pacific head of fixed income for State Street Global Advisors.
FTSE Russell declined to comment on the review of Malaysia's market on its index. Bank Negara's measures, announced last Friday, will allow foreign investors to hedge risks in the onshore ringgit markets even on an anticipatory basis, remove limits on the duration of hedges, and deepen bond market liquidity.
They partly address concerns over risk-management and access that forced overseas investors to pull about $14 billion from Asia's most foreign-owned bond market between November 2016 and March 2017. Central bank governor Nur Shamsiah Mohd Yunus said BNM has had "very positive engagement" with FTSE Russell, which decides next month whether to keep Malaysia on its World Government Bond Index (WGBI). Singapore-based brokerage Maybank Kim Eng said in a note this week the new measures "suggests a higher chance that Malaysia will be retained in the WGBI".
OFFSHORE RINGGIT When FTSE Russell announced its review in April, Malaysia's bonds slid with the 10-year bond yields rising 11 basis points over five days. The ringgit is down more than 1% against the dollar so far this year.
Analysts at Morgan Stanley said foreign investors have cut their Malaysian government bond holdings since late 2016, and said nearly $8 billion could leave Malaysia if it was dropped from the index. Malaysia represents 0.39% of the benchmark. Foreign holdings in Malaysia's bond market were about $157 billion in July.
Malaysian bonds have seen interest pick up as global central banks ease policy to support growth amid a long-running US-China trade war. Rate cuts in Malaysia have also helped: BNM lowered its benchmark rate in May for the first time since July 2016, becoming the first central bank in Southeast Asia to ease. However, there are issues hanging over the market. In 2016, Malaysia banned overseas firms invested in its markets from trading in offshore ringgit derivatives, the non-deliverable forwards.
Another is a plan by global index providers such as FTSE Russell to include Chinese bonds in their benchmarks, which analysts suspect will mean smaller constituents such as Malaysia are squeezed out. "The NDF has its own benefits and, for a lot of big asset managers, they historically prefer the NDF for ease of trading," said Mohammad Hasif Murad, an Asia fixed income investment manager with Aberdeen Standard Investments.
"The fact that we're taking important measures to stay on the index is a show of face on our side, and maybe this time around it is enough. But as China's weight increases, we may have to get kicked off regardless of what is done."
State Street's Ng, who maintained a neutral stance on the WGBI and whose investment portfolio includes Malaysia, said conditions for investment have improved from a year ago. "It's moving in the positive direction. Is it enough? That's a hard question to answer," Ng said. "Some investors are more difficult to satisfy compared to others."
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