Danger on the horizon for Malaysia’s bond markets?
Storm clouds may be gathering to rain on this year’s rally
Malaysian government bond markets have rallied along with the rest of Asia this year, but how long will it last?
Jonathan Rogers at the Asset notes that, despite having weathered a scandal involving state-owned investment firm 1MDB and the prime minister, Malaysia is facing a potential minefield.
For one, the country is set to add a current account deficit as the country focuses on infrastructure as part of the Belt and Road Initiative. The surge in capital goods spending to be expected would likely lead to a deficit, which one may recall led to falls in the Indian rupee and Indonesian rupiah five years ago.
The foreign exchange reserves of Bank Negara Malaysia have also collapsed over the past several years, from US$144.4 billion to less than US$ 100 billion. The reserves cover 6.5 months of imports, according the Commerzbank, one of the worst cover ratios in Asia.
And then we have a July 31 default on a payment due from the aforementioned state-owned 1MDB to Abu Dhabi’s IPIC. The five-day grace period has already expired, adding yet another layer of risk in the form of a possible default.