Malaysia risks falling out of global bond market index

Malaysia’s market accessibility level is in danger of being downgraded under the FTSE’s global classification framework.

This will see Malaysia fall out of the World Government Bond Index (WGBI), which it has been a part of since 2004, to the Emerging Markets Government Bond Index (EMGBI).

“FTSE Russell Watch List of fixed income markets being considered for potential reclassification includes China and Malaysia.

“Malaysia, currently assigned a '2' and included to the WGBI since 2004, is being considered for a potential downgrade to ‘1’ which would render Malaysia ineligible for inclusion in the WGBI,” read a statement released by FTSE Russell yesterday.

However, it noted that FTSE Russell will continue to engage with local regulators and market participants in Malaysia to assess the potential changes to the classification.

Malaysia’s inclusion on the watch list for potential reclassification is not a guarantee of the reclassification, it said.

“These markets will be reassessed against the WGBI eligibility criteria at the September 2019 review.

“Any WGBI inclusion or exclusion changes resulting from the review and the timetable for their implementation will be announced shortly thereafter,” the statement read.

FTSE Russell also noted that in implementing this framework, countries currently included in the WGBI were assigned a preliminary market accessibility level of ‘2,’ while countries currently included in the EMGBI, but not in the WGBI, were assigned level ‘1’.

Bloomberg reported that the ringgit’s decline today was partly due to concerns about Malaysia possibly being dropped from the WGBI, as well as due to falling oil prices.

According to Singapore’s Mizuho Bank Ltd head of economics and strategy Vishnu Varathan, the ringgit is also affected by headlines from former prime minister Najib Abdul Razak’s trial related to 1MDB, as well as Malaysia’s dispute with the European Union over palm oil.

'Euphoria about Malaysian stocks has faded'

Bloomberg also reported today that the benchmark FTSE Bursa Malaysia KLCI Index is down 14 percent from a record in May 2018, calling it the “worst major market in the world so far this year” as it has slipped 3.6 percent.

“Hopes of luring back global investors to a battered stock market are dimming by the day for Malaysia’s government,” the financial daily reported.

Samsung Asset Management Co reportedly said the gloomy outlook for the Malaysian stock market is not likely to lift anytime soon.

“Malaysia will likely disappoint over the next year because since the new government came in power in May 2018, it has been lowering public debt with fiscal tightening.

“This will be the theme from May 2018 to May 2020,” said Alan Richardson, a regional fund manager at Samsung Asset in Hong Kong.

Now that it has been almost one year since Pakatan Harapan took over the government, euphoria about Malaysian stocks has faded, reported Bloomberg.

This is due to the new government’s struggle with cleaning up corruption and inefficiency within the administration.

The Harapan government also lowered its 2019 economic growth forecast last month, and has been on an austerity drive to rein in its budget deficit.

According to data compiled by Bloomberg, foreign investors have dumped over US$500 million worth of Malaysian shares so far this year.

However, the business daily noted that Jakarta-based fund manager at Aberdeen Standard Investments Bharat Joshi said he was “neutral” on Malaysia stocks.

Meanwhile, Richardson noted that his dim view of Malaysian stocks was not because there was a downside risk, but “just that there is nothing to be positive about over the next 12 months”.