'Not in danger of defaulting'



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KUALA LUMPUR: A worsening global economic environment notwithstanding, Malaysia is not in danger of a massive liquidity crunch or a sovereign debt default triggered by a spike in foreign capital outflows, said The Edge Media Group executive chairman Datuk Tong Kooi Ong.

“I don’t believe there is a possibility of a default risk like, say, in 1997 to 1998, because the total amount of non-ringgit borrowings is very small relative to the central bank’s reserves. 

“Another example is that if you look at investment entities such as the Employees Provident Fund, 20% of its funds are already invested abroad in foreign currency,” he said during the Alliance Bank Malaysia Bhd’s Investment and 2015 Market Outlook Forum in Kuala Lumpur on Saturday.

In spite of near-constant monthly net outflows of so-called  “hot money” — or capital that is frequently bounced around financial markets to maximise interest or capital gains — since the middle of last year, foreigners still own 44.5% of Malaysian Government Securities (MGS) and 23.6% of Malaysian equities as at October last year.

According to AllianceDBS Research, total portfolio outflows amounted to RM17.5 billion for the first nine months in 2014, while equity outflows for the entire year came to about RM6.6 billion. 

“Since 2008, the Malaysian deficit has been largely funded by foreign money inflows as the cheap dollar and low interest rates encouraged borrowings, which were then channelled into emerging markets. We had a good run when massive liquidity was coming in, but the reality is that the situation is much less upbeat now,” said Tong.

AllianceDBS head of research Bernard Ching said the 44.5% of total MGS holdings owned by foreign money amounted to some RM140 billion. While he acknowledged that the figure is substantial, Ching ruled out a scenario of high volatility in the local bond market as experienced by Indonesia in late 2013 when the US Federal Reserve announced the tapering of its quantitative easing programme.

“There are numerous ways to absorb the outflow. One is that the central bank can direct the banks to channel some of their resources towards MGS under their liquidity management framework,” he said.

Nevertheless, there are real concerns about the government’s fiscal position. Malaysia currently has the lowest reserves to its short-term debt cover in the region at just 103%. By way of comparison, Thailand and Indonesia’s reserves constitute 294% and 199% of their respective short-term debts, Ching said.

Last Wednesday, credit ratings agency Fitch said that it would review Malaysia’s rating before the end of July this year following revisions to Budget 2015 — which Fitch said highlighted the country’s structural weaknesses — that was announced by Prime Minister Datuk Seri Najib Razak. The government is now targeting a fiscal deficit of 3.2% of the country’s gross domestic product (GDP) this year instead of its initial target of 3%. The GDP growth target was also revised to 4.5% to 5.5% from 5% to 6% to account for the slower economic growth environment ahead.

Fitch also maintained its “negative” outlook on the country, which it said meant it would, more likely than not, revise downward Malaysia’s sovereign debt rating.

“Despite what Fitch said, domestically, we have many institutional funds with the requisite capital resources to pick up on the exit of foreign capital and mitigate the liquidity risk,” opined Ching. “Liquidity is not so much of an issue here. The problem is more towards the structure of the economy, the government’s fiscal position, and executing reforms,” he added.

The consensus is that the global macroeconomic outlook for 2015 is more sombre than in previous years, but Tong believes that investment opportunities abound, particularly in equities.

“We think the reversal in US interest rates will be slower rather than faster, and smaller rather than bigger. Over the past two weeks, global stock markets have been buoyant in the expectation that a rise in the interest rate will be delayed — but bear in mind that it will eventually happen,” said Tong.

The US dollar had strengthened to a multi-year high against a slew of emerging market currencies, including the ringgit. According to Tong, despite falling unemployment and a growing economy, inflation rate in the US could still come down due to the stronger greenback.

“The implication of this for emerging markets is that in an environment of real negative interest rates, you will lose out if you save money as there will be a continued hunt for higher yields,” he said. Tong said that despite the challenging environment there are investment opportunities in equities, but one has to seek out companies that have solid business models and earnings. Many of these small to mid-sized companies are not well covered by research houses so investors have to seek them out.

Tong added that The Edge’s website, theedgemarkets.com, which was launched late last year, is a useful platform for retail investors to go to and analyse a company’s core fundamentals to make better investment decisions.

The site only covers Malaysia and Singapore for now, but Tong promised that the platform will gradually cover the stock markets of Thailand, Hong Kong and Indonesia.


This article first appeared in The Edge Financial Daily, on January 26, 2015.