Malaysian ringgit reels after index, fund

Bloomberg

It was a one-two punch that’s turned the Malaysian ringgit into Asia’s worst performer this month.
FTSE Russell said it may drop Malaysian debt from the FTSE World Government Bond Index because of concern about market liquidity, roiling the nation’s currency and bonds. And less than two weeks ago, Norway said its sovereign wealth fund will cut emerging-market debt including Malaysian securities from its index.
“The risk of dropping Malaysian bonds from the flagship index seems more likely than not, in our view, unless fundamental changes are made to improve Malaysia’s market accessibility level,” said Winson Phoon, head of fixed-income research at Maybank Kim Eng Securities in Singapore.
The move threatens to put more pressure on the nation’s markets, with the stock index underperforming every major benchmark in the world this year. If Malaysia is dropped from the FTSE gauge, bond outflows may total almost $8 billion, based on its weighting of 0.39 percent and IMF’s estimate that $2 trillion track the index, Morgan Stanley said.
The ringgit fell for a second day on Wednesday, and reached 4.1455 per dollar, the lowest since Jan. 25. Yields on the benchmark 10-year bond climbed four basis points, while the stock index also declined for a second day.
The concern about Malaysia’s market liquidity follows a central bank prohibition on trading in non-deliverable forwards in 2016. Bank Negara Malaysia subsequently introduced measures to allow investors to hedge their currency exposure in a bid to restore confidence.
Bank Negara said that volume in the FX forwards market had climbed two-fold since it introduced the hedging measures in December 2016. As at end-March, 70 non-residents and 17 resident investors with a combined $31.2 billion of assets had used the program to hedge, it said a statement.
Sizable bond outflows may hurt Malaysian equities, which have a correlation of about 87 percent with the ringgit, Morgan Stanley analysts Sean Gardiner and Aarti Shah wrote in a report.
Foreign outflows reached $504 million so far this year, the most in Southeast Asia, compared to $2.3 billion of government bond inflows, the analysts wrote.
Euphoria about Malaysian stocks has faded after almost one year since Prime Minister Mahathir Mohamad’s surprise election victory in May, as the new administration struggled with the debt liabilities from the previous government.
The nation’s bonds had just capped a fourth month of gains in March on expectation that the central bank may cut rates as early as May.
Bank Negara Malaysia pledged last month to keep monetary policy accommodative as global risks weigh on the trade-reliant economy.