KUALA LUMPUR: Malaysia's financial discipline should appeal to foreign investors through portfolio inflow and this will support local bond yields as well as the ringgit.
The government's planned reduction in fiscal deficit should also see a reduction of government bond supply over the next few years, said Franklin Templeton.
However, in the short term, there is risk of potential increase in government bond supply especially on the longer end, due to conversion of short-term Treasury Bills to longer tenure government bonds.
"In addition, inflation may still linger in 2024 due to the incremental increase of 2.0 per cent of Sales and Services Tax to 8.0 per cent, and the removal of price ceiling for chicken and eggs," Franklin Templeton head of Malaysia business Hanifah Hashim said.
Although petrol subsidy rationalisation was not announced in the budget, the projected inflation of 2.1-3.6 per cent seems to imply that this may be executed in 2024, she added.
As the petrol subsidy rationalisation scheme remains opaque at this juncture, the bond market has yet to price in this event.
Bond yields should be supported once inflation uncertainties stabilise and prove to be manageable in the medium term.
"Although the government bond market is expected to be volatile with an upward yield bias during this period, the corporate bond market should do well as there is a window of opportunities for corporations to raise funds with attractive spreads above the government bond yields.
"We expect construction sector bonds to do well if infrastructure spending is carried out in a timely manner in 2024," Hanifah said, when commenting on the recently-announced 2024 Budget.
Furthermore, continued emphasis on the road infrastructure projects in east Malaysia which includes the Pan Borneo Sabah and Sarawak-Sabah Link Road (SSLR) Phase 2 projects, will prompt more construction companies to tap the bond market to seek funding, as well as some projects to be funded through government guaranteed issuance.
On the other hand, she said the property segment is expected to remain lacklustre.
This is despite some initiatives to revive abandoned projects and relaxation of the residency through investments, Malaysia My Second Home MM2H requirements.
With lower net disposable income (from higher SST and higher prices of basic goods like chicken and eggs, which will cause multiplier effect on food prices in restaurants etc) coupled with higher Overnight Policy Rate and poor rental market, demand for property is unlikely to increase sharply in 2024.
Hanifah said the government's allocation of RM2.47 billion for housing projects in 2024, including RM1 billion to support reputable developers in restoring abandoned projects, is commendable and contributes significantly to property sector revitalisation and housing development.
"Sustainability and energy transition are key priorities in the 2024 Budget, with support for Sustainable and Responsible Investment and the issuance of a biodiversity sukuk.
"We might see more primary corporate bonds issuances from the renewable energy space especially from the solar industry which is positive news for the domestic bond market," she added.
Overall, Franklin Templeton believes the 2024 Budget is well balanced, emphasising good governance, fiscal responsibility and with a focus on the welfare of its people.