Wednesday, April 15, 2015

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.


  1. Just like what Daim said in his latest video, the ringgit is weak is because people lack the confidence in it.

    People are more than happy to hold onto Singapore Dollar for no interest is because they trust Sing Dollar, just ask any aunty and uncle in pasar malam and etc.

    at the end of the day, fundamentals and perceptions plays a big role. as long as corruption is not take care of but the corrupted is taken care of, no amount of graph, expalantion, songs and etc will strenghten our ringgit and economy.

    as the saying goes, do what is right, not what is easy. but, i doubt UMNO will ever take the initiative to weed out corruption... MCA MIC.... they are nothing more than dolls.

    1. @anon 12.17

      I can't believe Daim said that - he's obviously not looking at what's really going on. If confidence was the key to the exchange rate, how would one explain the fact that the Ringgit has outperformed the Euro, the Pound, the Canadian Dollar, the Japanese Yen and the Aussie Dollar?

    2. Yes, but it hasn't "outperformed" the Sing $, has it?

      Is it because the Singapore economy and financial position is "intrinsically stronger" than that of Malaysia?

      Daim and Zeti can declaim that the Ringgit is "undervalued". The forex market and the moneychangers are telling a different story.

      And, more often than not, the "markets" and the "street" get it right than do high-falutin' opinions from politicians and policymakers!

  2. Hi Hisham,
    I enjoyed your cynical-factual writing style. Keep it up, will be back for more.


  3. Yes, thank you Hisham. We badly need the intelligent discourse as yours without the bravado and braggadocio as some, cough, are wont to. :)

  4. Interesting that you wrote this:

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

    only to backtrack somewhat in order to qualify that with this:

    "But the bottom line is that, bar managing FX liquidity in the “rush for the exit” situation we saw from Nov-Jan",

    I dont know what thought algorithms lay behind those statements and neither am I keen to explore that angle of the narrative.

    All I would say is thank you for those priceless observations/insights??. They merely confirm what I had suspected all along with the available data sets from BNM etc merely affirming that hunch. Thanks again anyway.

    Warrior 231

    1. Morning, the grass is fresher today... much civil. Very sharp.

      Nevertheless, the market just want to run us down one way or another even with remote / non-existence link whatsoever so they can make a quick buck or trying to get out of short position.

      Have a nice day

      Zuo De

    2. @Warrior

      Glad to help, though I'm not sure what for. Still seeing shadows are we?

      But hey, be careful out there. I'd say that October is actually a better time to buy than sell (statistically speaking), but there's always those pesky black swan events.

      The time I'd be concerned about would be later next year. A few chickens coming home to roost.

    3. Thanks but no thanks....No I will not touch any of that stuff, never have dabbled in Asian stuff anyway, too toxic, unpredictable or stained to be worth the hassle.

      Though fundamentals are strong and intact and market confidence is there as indicated by sukuk's over subscription and yesterday's bullish MYR comeback and oil's recent surge,I still feel the big elephant on this side of the room is China.

      As of now, it is tanking as I predicted in AKJ's blog mid last year but the US recovery and a mild Japanese bounce papered that over temporarily back then. But recent Japanese and US data are not cause for celebration though that means that if things persist as they are, a Fed rate hike is faraway and the MYR may have the winds on its back for a change.

      Whatever, I think for the foreseeable future at least, extra-economic affairs will hold sway and its time to liquidate gradually and stay liquid awhile as cash will be king.

    4. Sorry for not putting down my nom de guerre up there as usual....hahahaha.Must be the "too much time on my hands today" syndrome. Anyway, why I feel the MYR will have some upside:

      though this may be a dampener going forward. The travails of being a resource blessed economy I suppose...cue Australia...hahahaha

      Warrior 231

    5. Hey dude....I just noticed your infernal comments machine is putting up weird pixs of pizzas and steak to choose!! are in the food biz now or attempting to firewall me for being a pesky nuisance? hahahaha....I sure ain't any tin can robot or lobotomised troll...hahahaha

      Warrior 231

  5. Morning Zuo De, nice to see you cheery and chirpy albeit cryptic.

    It is true markets run one way or another but in this case the evidence shows that it was being steered by someone for a while at least, late last year. Others may beg to differ but flying beneath another plane to avoid radar is a skill by itself that few can master excepting if one had had the experience beforehand.

    By the way, if you study the Dow whilst paying attention to the stream of data from the econs boffins plus reactions from the financial press as I have been doing late nights for the past year (due to vested interests of course), you cannot help but notice the swing of the pendulum borders the absurd. You see data can be massaged to swing the Dow up or down . So one day...job numbers are up, the next day those applying for unemployment benefits are up and three days later manufacturing indices can go down or jump two days later in a blink of an eye or growth rates are suddenly revised upwards or downwards. Makes you wonder doesn't it. Spread it over the long run and you get an upward trend but look closer you will see inexplicable peaks and troughs. Same with the dollar, oil and gold. I guess it must be the naked glory of capitalism at work..... hahahaha

    Which brings me to a couple of other things. The Australian economy is tanking and the AUD lost roughly 25% of its value vis-a-vis the US$ (from parity). It would be interesting to work out how the currencies of other resource cursed entities like Indonesia, Malaysia and New Zealand have suffered and in Malaysia's case then work out how much of that depreciation is due to oil. I am working on that and it gets interesting all the time.

    Secondly and more importantly, I think something huge will happen on the global stage that will knock all economies off kilter. I wager that central to it is the Iran-US Nuclear talks and accords, Israeli and Saudi reactions. The preliminaries are already being set in motion, the Saudi intervention in the Yemeni conflict etc, Russia's delivery of missiles : and Saudi ally, Pakistan's successful test firing of nuclear enabling missiles:

    So be ready with the popcorn after October or thereabouts for by then we would have seen the 4th blood moon...hahahahaha

    Warrior 231

    1. And the neo-con (of USA) is hoping mad that Russia has impinged on the rights of Israel to bomb Iran. And as if they have done no wrongs to give the Ukraine offensive weapons to "defend" themselves.

      Zuo De

  6. Hisham - in spite of your optimism about the Malaysian economy and the Ringgit, things are not A-ok.

    I am in Singapore for the weekend. Today's front page reports in the Singapore Straits Times:

    "Singapore's non-oil exports up 18.5% in unexpected surge"

    "Malaysians' ringgit woes"

    Why is the Ringgit being weakened by a surging US Dollar, while the Sing Dollar manages to stay relatively unscathed?

    It's not funny anymore, when your currency is perceived as being a "Mickey Mouse" one!

    Economists may have all sorts of fancy theories to explain this, but for ordinary Malaysians, it is downright humiliating.

    1. @anon 9.06

      I'm prepping a post about this, should be up some time tomorrow. You're not the only one who's asked me this

  7. Hi Hishamh

    Do you have any explanation on the $5Bil islamic and conventional bond issued by Petronas?

    1. @Group 8

      My sister was part of the roadshow team. The very prosaic explanation is that this is a good time to issue debt, when yields on USD debt are still low and before the Federal Reserve starts hiking US interest rates.

    2. The yields on Petronas debt is not dependent on the yield of US debt. Irregardless of its denomination. No?

      Issuing usd denominated debt now (fundamentally USD is overpriced now), anticipating a lower usd/myr rate in the medium term, would effectively make the debt cheaper for us to service. Yes?

    3. @Rijal Ishak

      Actually, there is a link. The yield of Petronas debt is effectively that of the Malaysian sovereign, and MGS is correlated with UST. Pricing for the bond issue was based on spreads over the equivalent US debt.

  8. The mind is such a wonderful "thing", it just could not rest ... conspiracy theories abound, half truth, half lies and we are all sway by it (me included). But forward we go to keep seeking the "truth" where ever it maybe.

    Read an interesting book lately "How Rich Countries Got Rich .. and Why Poor Countries Stay Poor" Erik S. Reinert. Poor Mongolia.

    Zuo De