KUALA LUMPUR: The cost for Malaysia to replenish US dollar holdings has risen to an 11-month high as foreign-exchange reserves slump to the lowest since 2011.
The difference in yield between the nation’s 2.991% sukuk due in 2016 and similar-maturity Treasuries was 84 basis points, the widest since February, data compiled by Bloomberg show. The securities are one of only three global notes the country has outstanding, which are all Islamic, and the others mature in June this year and in 2021.
Malaysia’s currency has declined to its lowest level in more than five years on concern the drop in crude prices will erode the oil-exporting nation’s current account surplus. Reserves in South-East Asia’s third-largest economy have dwindled to US$121bil, versus US$157bil in Thailand and US$111bil in Indonesia.
“Since the spread is expected to widen in the near future and the country’s financial health is weakening, it doesn’t pay for Malaysia to issue dollar sukuk now,” Nizam Idris, head of foreign-exchange and fixed-income strategy at Macquarie Group Ltd in Singapore, said by phone yesterday.
“Timing is important and there’s a window of opportunity in the second quarter before the US raises interest rates.”
The central bank told local lenders last month to guard against speculation in the ringgit, which led losses in Asia in 2014 behind the yen. All short-dated transactions requiring the exchange of ringgit for a foreign currency must be backed by documentation, Bank Negara said in a Dec 4 statement.
Diverging monetary policies in the US and Europe are also increasing demand for the dollar, forcing policy-makers in some Asian countries to intervene to curb losses. European Central Bank president Mario Draghi last week signalled the prospect of government bond purchases. The Federal Reserve halted its debt-buying programme last year and is likely to increase borrowing costs sometime after the first quarter.
The extra yield investors demand to hold Malaysia’s 2021 Islamic bonds climbed to a six-month high of 99 yesterday. The yield on the sukuk due in June this year has increased 35 basis points, or 0.35 percentage point, from 2014’s low to 1.09%. That compares with 0.06% for the similar-maturity Treasury notes.
Concern about the nation’s finances is already starting to show in the local-currency debt market, where global funds reduced holdings of Malaysian government bonds in November by 5.8%, the most since September 2011, to RM236.5bil, central bank data showed Dec 31.
The surplus in Malaysia’s current account, the broadest measure of trade, shrank to RM7.6bil in the third quarter, the least since the three months through June 2013.
The nation is the only net oil exporter among major Asian economies and tumbling crude prices will reduce state income as the government seeks to cut the fiscal deficit to 3 percent of gross domestic product this year from last year’s 3.5 percent target. Brent crude dropped below US$60 a barrel in December for the first time since 2009.
While Malaysia’s foreign-exchange reserves have dwindled, they are still higher than the US$91bil at the end of 2008, when the ringgit dropped 4.6% in the midst of the global credit crunch. In 1997-98, when the Asian financial crisis struck, they were as low as US$20bil.
Demand for global Islamic bonds, which pay returns based on assets to comply with a ban on interest, may still be supported this year amid a shortage of supply.
The Bloomberg Malaysian Sukuk Ex-MYR Index, which tracks foreign-currency syariah-compliant bonds, climbed 5% in 2014, a fourth straight annual gain. Worldwide issuance rose 7.4% to US$46.3bil, just shy of the unprecedented US$46.8bil in 2012, data compiled by Bloomberg show. Offerings in Malaysia increased 27% to RM62bil.
“The spread widened because of concern that falling oil prices will crimp the government’s revenue,” Nik Mukharriz Muhammad, a Kuala Lumpur-based fixed-income analyst at CIMB Investment Bank Bhd, said by phone yesterday. “It’s still not expensive for the government to tap the dollar bond market as US yields are still not high.