Sentiment in Malaysia is running high. Participants at IFR’s Malaysian Capital Markets Roundtable in Kuala Lumpur on October 8 noted that the country came through the crisis relatively unscathed. Malaysian banks are generally in good shape and, from a capital markets perspective, the country is broadly self-sufficient.
G3 bond and offshore loan volumes from Malaysian borrowers pale into relative insignificance against the quantum of funds raised in the local market. Such is the depth of Malaysian liquidity that this is now being recycled offshore. Even when international markets were closed during the crisis, non-domestic borrowers were able to tap the ringgit market. Ringgit swap spreads have moved against cheap opportunistic arbitrage funding for non-domestic borrowers - or at least it’s much less compelling than it was - but the experience of playing host to foreign issuers has definitely put Malaysia on the map.
Malaysian capital markets professionals are now pushing for a region-wide bond market under the ASEAN Plus Three (APT) umbrella - i.e. ASEAN plus China, Japan and Korea - that would work under a set of harmonised regulations, and unified clearing and ratings. The end-game of this initiative would be the creation of an important capital markets hub that would not only keep Asian savings in the region rather than having them seep into the West; it would vie as a substitute to Reg S or 144a issuance.
Initial scepticism about foreign (mainly Korean) issuers spiriting Malaysian savings out of the country has given way to confidence that the country can play a large part in recycling regional capital for local re-investment and in attracting foreign capital to Malaysia, a key goal of the government as it starts out on its road to developed-nation status by 2020.
There are gaps in the Malaysia’s banking and capital markets toolkit, though. The country’s bond market is top-heavy. Banks, institutional investors and pension funds are heavily geared to Double A names; liquidity for Single A and mid-market names generally is constrained. It’s the same story in the bank market.
To get around the mid-market’s lack of access to funding, the government created Danajamin in mid-2009, a financial guarantee insurer. The problem with government-wrapped debt is that it distorts risk pricing and puts the burden on the government to manage credit risk while investors are effectively sold cheap government debt. The government needs to move quickly to place the burden of responsibility onto private investors to carry out their own due diligence and credit research.