KUALA LUMPUR: FOREIGN holdings of Malaysian bonds, particularly Malaysian government papers, which have risen to significant levels in recent times, are likely to pose a liquidity risk this year.
However, there is sufficient domestic “dry powder” to absorb selloffs, says Maybank Investment Bank
It says there is sufficient “domestic capacity” to absorb foreign bondholders’ selloffs even in the most “severe” scenario the research house can conceive of for potential selloffs.
“The banking system is sitting on RM171 billion excess liquidity — based on the loans-deposit ratio of 89.8 per cent as at December last year and RM200 billion excess liquidity placed at Bank Negara Malaysia at the end of last year that can be released back into the system,” Maybank Investment said in a report.
The 10-year MGS (Malaysia Government Securities) yield has fallen further to 4.148 per cent at the end of last month, from 4.228 per cent at the end of December last year.
Foreign holdings of MGS and Malaysian Government Investment Issues (MGII) totalled RM190 billion, or 32.1 per cent, of the total outstanding amount of MGS and MGII.
Liquidity has stabilised with M3 growth and amid recent pick up in M1 growth. One potential risk to liquidity is the selloff in foreign holdings of Malaysian bonds, which are dominated by their ownership.
Three scenarios were drawn up based on the likely selloffs by foreign bondholders.
The “mild” scenario sees the lowest foreign shareholding of total MGS+MGII outstanding was at 28 per cent in August 2013 as a result of “Taper Tantrum”.
“In view of the on-going “Trump Tantrum”, assuming the shareholding drops to 28 per cent, then we are looking at a potential RM24.3 billion decline in the value of foreign holdings of MGS+MGII.”
And the “alternative” scenario that is attracting attention, in view of RM66.8 billion MGS+MGII maturing this year are the three-, five-, seven-and ten-year tenors.
“Assuming they do not re-invest after maturity, then we are looking at a potential RM36 billion decline in the value of foreign holdings of MGS+MGII, leading to a drop in the foreign shareholdings of MGS+MGII to 26 per cent.”
In a severe scenario, it implies potential RM104.5 billion selloffs by foreign asset managers and foreign banks, lowering foreign shareholdings of MGS+MGII to 14.5 per cent.
The research house said money supply (M3) grew by three per cent in December, supported by faster growth in the business sector loans amid slower household loans and total deposit growth.
Total deposits (excluding repurchase agreement) moderated to two per cent in December last year including, the Islamic banking’s investment accounts (IA) that were reclassified from Islamic banking’s deposits July 2015, which resulted in IAs being taken out from the banking system’s total deposits.
The adjusted total deposits, and hence M3 growth for December last year were three per cent year-on-year.
The banking system’s total loans growth was stable at 5.3 per cent as pick up in business loans growth — mainly extended to small and medium enterprises and sectors like finance, insurance and business services, wholesale and retail trade, transport storage and communication and restaurants and hotels — offset the continued slowdown in household loans growth.
M1 (notes and coins in circulation and demand deposits — savings and current accounts — a measure of transaction demand for money, hence a proxy of consumer spending) growth quickened late last year signalling consumer spending growth is intact, notwithstanding the weak consumer sentiment.