Malaysian ringgit banknotes of various denominations are arranged for a photograph in Tokyo. The ringgit is Asia’s worst performer this year, down 14% against the dollar.

Reuters/Singapore


Foreign investors in Malaysia’s bond markets have stayed put through months of economic and political uncertainty but a sudden spurt in currency volatility appears to be testing that allegiance.
Foreign fund managers and other investors have been heavily invested in Malaysia – they hold nearly half of outstanding government bonds – through the ringgit’s slide in the first half of the year on worries about US monetary policy tightening, falling global oil prices and a scandal at a local state fund.
They sold some assets in July as the ringgit’s losses mounted, cutting holdings to 206.8bn ringgit ($50.7bn), the lowest since August 2012. Outflows last month were 5.2bn ringgit, central bank data showed.
But that trickle could become a flood if investors lose faith in the ability of Malaysian authorities to defend the currency. The ringgit is Asia’s worst performer this year, down 14% against the dollar.
Last week it hit a 17-year low past 4.15 per dollar, levels not seen since before it was pegged in September 1998. At the same time, it has turned volatile, swinging as it had on very rare occasions in 2013 and 2010.
“We see value in Malaysian bonds as the yield is attractive for its investment grade rating, but are cautious as we expect further currency volatility,” said Guan Yi Low, investment director of fixed income at Eastspring Investments in Singapore.
While the central bank has sold dollars to try to support the currency, governor Zeti Akhtar Aziz said last Thursday there was no need to re-peg the ringgit to any other currency or impose capital controls. The central bank said the “economy will remain resilient in the face of a challenging environment”.
Analysts believe most offshore holdings of bonds are with long-term investors who like Malaysia’s investment grade rating and policy stability, even though yields aren’t as high as in other high-yielding emerging markets.
Ten-year yields are at 4.3%, up from 3.8% six months ago. “The ringgit will be a cause for worry for any foreign investor given the pace at which it has been depreciating,” said Lee Jin-yang, a macro analyst at Aberdeen Asset Management in Singapore.
Investors who shrugged off uncertainty about the future of Prime Minister Najib Razak and corruption allegations involving indebted state fund 1Malaysia Development Berhad (1MDB) are now worried about declining currency reserves, the rising cost of hedging bond holdings and capital controls despite the central bank assurances they won’t be imposed.
1MDB, which has debts of more than $11bn, is under investigation for graft and financial mismanagement. Najib, who chairs its advisory board, has denied any wrongdoing and has survived the political crisis while tightening his grip on power. Meanwhile, international reserves fell to a five-year low of $96.7bn in July as the central bank sold dollars to defend the ringgit.
The cost of insuring Malaysian debt against default in the credit default swap market is near four-year highs.
It costs an annualised 3% to hedge three-month exposures to ringgit assets, although most foreigners tend to use the offshore non-deliverable forwards to buy insurance.
“If everyone is doing that, the hedging cost will explode. Eventually they will need to liquidate,” said Andy Ji, Asian currency strategist for Commonwealth Bank of Australia in Singapore.