Asia Times: Malaysia ends self-exile from bond markets



	May 14, 1999	atimes.com

Southeast Asia

Malaysia ends self-exile from bond markets
By Kenny Hargrove
Bloomberg News

Kuala Lumpur - Malaysia is making a $3 billion bet that international investors have short memories.

Just eight months after it imposed capital controls, trapping about $18 billion in the Southeast Asian nation and prompting the scorn of fund managers from Singapore to Sweden, it raised the size of a planned $2 billion bond sale by 50 percent.

It's hoping its first issue of U.S. dollar bonds since 1990 will draw strong demand now that it has eased capital controls and the country's economy is on the mend. Malaysia is readying at least three teams of economic pitchmen - one led by Finance Minister Daim Zainuddin - to cross the globe starting next week looking for buyers for its bonds.

The sale may get a mixed reception. ''Malaysia will have to do a good job convincing investors that it will not again resort to market closing tactics like capital controls,'' said Dalip Awasthi, head of Asia fixed- income research at Lehman Brothers in Tokyo.

Still, most analysts agree the country's outlook is brighter today than even a few months ago and that the sale, managed by Salomon Smith Barney, may be a way to ride its recovery story.

''The market has been crying out for a sovereign deal for ages,'' said James Milligan, head of Asian credit trading at HSBC Markets in Hong Kong. ''This deal should be welcomed with open arms."

While Malaysian state-enterprise bonds offer yields as much as 100 basis points more than sovereign bonds from Thailand and South Korea, which have similar credit ratings, selling such a large bond may not be easy. ''It could be a stretch given that political risk in Malaysia is still higher than in other recovering Asian economies,'' said Awasthi.

Malaysia's decision last year to impose capital controls that were only partially eased this year, combined with the 76- day trial of former deputy prime minister Anwar Ibrahim, prompted many international investors to demand higher risk premiums for Malaysian assets.

The yield premium for Malaysia's benchmark bond, the state- owned Petroliam Nasionale Berhad 10-year Yankee bond due 2006, is about 255 basis points more than U.S. Treasury bonds of comparable maturity. That's about 84 basis points more than Thailand's 10-year Yankee bond due 2007 and about 52 basis points more than South Korea's 10-year global bonds due 2008.

Because all three bonds share the same BBB- credit rating from Standard & Poor's Corp., many traders and investors believe that, political issues aside, Malaysian bonds are undervalued and could rally as political uncertainty subsides.

''When you look at Thai or Korean paper the upside potential still exists,'' said Benoit Descourtieux, associate director, Indocam Asia Asia Management in Hong Kong. Indocam has about $150 billion under management worldwide. ''On a relative basis we could see some decent demand for a Malaysian issue."

While Malaysia still faces serious economic problems, including rising bad loans for commercial banks and excess supplies of new residential real estate and commercial office space, analysts said it's poised for a turnaround.

Malaysia expects its economy to grow as much as two percent this year. Last year, it slipped into its first recession since 1985, with the economy contracting a record 6.7 percent.

Now, international credit rating agencies are signaling a drop in the risk of buying Malaysian bonds. Both Moody's Investors Service Inc. and Standard & Poor's Corp. in April raised their outlook for Malaysia's investment grade credit rating to ''stable'' from ``negative.'"

Late in the same month, Fitch IBCA called a press conference - unusual practice for a credit rating agency - and upgraded Malaysia to BBB-, its lowest investment-grade rating, from a rating of BB.

''These positive signs show that the international (financial community) is becoming more receptive to Malaysia's . . . reforms, and are changing their perceptions about investing in Malaysia,'' said Mustapa Mohamed, the country's second finance minister.

Malaysia, meanwhile, estimates its plan to revitalize and restructure the national economy will require total financing of 58 billion ringgit ($15.26 billion) during 1998 and 1999. This amount includes the total fiscal deficit of the federal government, the cost of restructuring banking institutions, and the development of infrastructure projects.

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©1999 Asia Times Online Co., Ltd.

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