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Malaysia's bond market rebounds but more to do

KUALA LUMPUR: Malaysia's corporate debt market has rebounded as the economy shows strong signs of recovery and corporations restructure, but analysts say the government must do more to boost activity.

Rating Agency Malaysia said in a report there were 26 issues of private debt securities (PDS) in 1999 worth 28.42 billion ringgit ($7.48 billion) against 10.832 billion ringgit raised the previous year.

The market was hit by the regional financial crisis over the last two years but stable interest rates and increasing private investment have begun attracting investors.

"The interest in ringgit bond market has increased. In the recent months, we have seen interest coming back from offshore investors to invest in ringgit instruments," said Raymond Lee, treasurer at Standard Chartered Bank Malaysia Bhd.

The central Bank Negara has said in the coming months it will focus on improving the liquidity of the government securities market, which is key to development of the overall bond market.

Bank Negara has vowed to improve the issuance process of government securities, institute a pre-announced calendar for auction and remove curbs on repo transactions by corporates.

"It will help in tackling the issue of liquidity and short supply of quality papers," said Aza Hamzah, senior general manager and head of treasury department at RHB Sakura Merchant Bank.

A government panel has also proposed that companies with a lower investment grade than the current BBB threshold be allowed to issue bonds to increase liquidity in the market.

Bond dealers said capital controls imposed by Malaysia in September 1998 had initially driven investors away from the domestic bond market but foreign interest, mainly in short-term and government papers, had renewed in recent months.

Foreign investors in the ringgit bond market are free to repatriate both capital and funds invested in ringgit instruments.

"They can bring in money and buy ringgit to buy bonds but they cannot hedge the exchange risks," Lee said, adding controls were not impeding the growth of the bond market.

Analysts say the lack of a core benchmark asset, mainly of government securities has made it difficult for Malaysian corporates to price their bonds.

And despite government moves, they remain sceptical the market will take off anytime soon.

"The authorities are just repeating the same things. They must begin implementation," said a bond dealer at a local bank.

Dealers said investors and buyers had become more cautious since the regional financial crisis and were interested only in quality papers.

"Only the 'A' rated, prime companies are able to attract buying interest. There is not much liquidity in even BBB rated firms," said the head of treasury at a local firm.

Dealers said the government should issue more longer term securities, at regular intervals, to create a benchmark and additional liquidity in the market.

The government has said it plans to do this but has not said when. Dealers say there would be an immediate increase in corporate debt market activity if the government issued more securities as this would then help create a market benchmark. "There has to be increased issuance of MGS (Malaysian government securities) on a more regular basis," the bond dealer said.

"Currently, government issues bonds only when it needs finances," he added.-Reuters