Malaysian Bond Costs Soar

In 2014, Malaysia’s currency dropped to its lowest level against major currencies in over five years. Lower crude oil prices are to blame, resulting in a rapid depletion of its current account surplus. In addition, government data revealed that the value of oil reserves in Southeast Asia’s third-largest economy shriveled to an estimated 121 billion US dollars, low compared to other South East Asian oil exporting countries.

In 2014, Malaysia’s currency dropped to its lowest level against major currencies in over five years. Lower crude oil prices are to blame, resulting in a rapid depletion of its current account surplus. In addition, government data revealed that the value of oil reserves in Southeast Asia’s third-largest economy shriveled to an estimated 121 billion US dollars, low compared to other South East Asian oil exporting countries.

Recently, Malaysian Prime Minister Najib Razak has said that the cost to replenish dollar assets had risen to 11-month peak as local forex exchange reserves dipped to their lowest level since 2011.

Pressured Debt Market

Islamic bond yields due June 2015 have widened 35 basis points. Worry over the nation’s financial situation has already begun to appear within the Malaysian currency and debt markets. According to experts, the spread between the nation’s 3% sukuk (Islamic bonds) due in 2016 and other instruments of similar maturity was about 84 basis points, the widest since February 2014. On the plus side, the sukuks are only one of three global bonds the country has outstanding. Others that mature in 2021 are less of a concern.

In December 2014, officials from the central bank of Malaysia urged local lenders to safeguard against speculation over the ringgit. The recent monetary policy divergence between the United States and Europe has led to increasing demand for US dollars. This has forced many Asian policy makers to act like intermediaries in their debt market. Last year, The Malaysian Federal Reserve ceased its debt-buying initiative and now expects to increase lending after the first quarter of 2015.

Oil Price Impact

Malaysia is a prominent oil exporting country among major Asian economies. Local analysts are concerned that downward spiraling crude oil prices will reduce national revenues as the government seeks to slash fiscal deficits to 3 percent of gross domestic product (GDP). The surplus in Malaysia’s current account, the broadest measure of trade, shrank to 7.6 billion ringgit in the third quarter on 2014. Experts, however, are optimistic since they believe the cost involved for the government to penetrate the untapped US dollar bond market is not overtly high since US yields are so low.

Optimism Prevails

Although Malaysia’s foreign exchange reserves are lower, it is still higher than the 2008 level. Before that, foreign exchange reserves were as low as US 20 billion dollars when the Asian financial crisis struck during 1997-98. Demand for global sukuk in 2015 may rest on a supply shortage.

Data shows that the Malaysian Sukuk Ex-MYR Index, an index that followed Shariah-compliant forex bonds, rose by 5 percent in 2014 alone. Overall, the global market for sukuk seems tuned to benefit from another year of growth, though some investors contemplating a reduction in allocation of asset classes that could cause yields to rise.