Government Debt and FX Reserves

From Bloomberg via The Edge (excerpt):

Malaysia raising $2 billion as worst Asia currency saps reserves

SINGAPORE/KUALA LUMPUR (Apr 14): Malaysia is tapping the U.S. dollar bond market for the first time in four years as it burns through foreign-exchange reserves defending Asia’s worst currency.

The government is poised to sell as much as $2 billion of Islamic notes this week, one month after state-owned Petroliam Nasional Bhd. issued a record $5 billion of sukuk and conventional debt in the U.S. currency. Malaysia’s foreign currency holdings fell 9.4 percent this year, the steepest first-quarter loss since the 1997 Asian financial crisis. The ringgit dropped 5.4 percent, compared with a 4.6 percent slump in the Indonesian rupiah.

“Foreign exchange reserves have certainly been under pressure for some time, as the central bank has been defending the currency in an environment of near-consensus expectations of further weakness in the ringgit,” said Prashant Singh, the Singapore-based lead portfolio manager for Asian emerging debt at Neuberger Berman Group LLC, which manages $250 billion globally. “These offshore issuances do appear to be quite conveniently timed to provide a boost to the reserves.”

Malaysia, Asia’s only major oil-exporter, has seen the cost of insuring its debt soar the most in the region this year as a slump in crude prices forced the government to raise its 2015 budget deficit target....

First off, nobody remembers poor Brunei. No, Malaysia is not Asia’s only major oil exporter. For that matter, last time I checked, most of the Middle East and the Central Asian Republics are in Asia too.

Apart from that faux pas, the government’s USD bond issue (the road show has been going on since last week) is mainly to refinance existing FX borrowings that will come due in 2H15. The “convenient timing” has more to do with that maturity deadline then it does with replenishing FX reserves. The other part about the timing is that with the Fed poised to raise US interest rates for the first time what seems like a lifetime, its better to raise USD borrowings now before the US Treasury yield curve shifts up.

The other thing is that the government and Bank Negara are separate entities with separate accounts. In that sense, I’m a little surprised over the “expert” commentary quoted in the article. BNM doesn’t need the government to go borrowing in foreign currency to build FX reserves. In fact, it doesn’t have to borrow USD at all – it just creates new Ringgit and buys foreign currency off the open market. That’s the usual way central banks pad their FX assets. Why borrow and pay interest, when you can buy for free? Of course there’s the implication that the exchange rate would drop a little, but USD2 billion is only about half a day’s FX volume on the interbank market.

Last but not least, there’s been precious little “defending” of the Ringgit going on since January (RM millions):

Don’t sweat the increase in March – the increase in FX reserves is mostly due to marking reserves to market (in USD terms, there was virtually no change in FX reserves between February and March). But the bottom line is that, bar managing FX liquidity in the “rush for the exit” situation we saw from Nov-Jan, BNM has largely been hands off the last couple of months.