While 2020 had been a year of many challenges, we expect 2021 to shape out into one that is relatively less "unprecedented". Growth risks in Malaysia should gradually fade with the general availability of the COVID-19 vaccine though recovery at the sectoral level will likely remain choppy. On the aggregate, we expect GDP growth pace to come in at between 6.2% and 6.7%.
Given the unprecedented scale and scope of the pandemic's impact, we cannot ignore the possibility that more fiscal support – again debt-led – could be forthcoming, especially with currently rising infections. It is also important to note that the vaccine rollout could take time. On the monetary side of the fence, we expect the BNM's accommodative policy stance to remain in 2021. We see further rate reductions as off the table with both domestic and external demand expected to recover further going forward, and especially after the 125-bps rate cut to 1.75% last year.
Amid prospects of improving economic outlook, MGS yields are projected to hover higher to between 2.60% to 2.90% in 1H2021. We expect the MGS yield curve to steepen further in 1H2021 given the expected heavy supply – as evidenced by the expansionary Budget 2021 – to support the government's fiscal initiatives.
Gross issuance of MGS/GII should thus remain robust in 2021 at between RM150.0 billion to RM160.0 billion. Our forecast is based on 1) the government's projected budget deficit of RM84.8 billion; and 2) RM67.7 billion worth of MGS/GII papers that would mature in 2021. It is notable that in August 2020, the statutory debt limit was raised temporarily for two years to 60.0% of GDP from 55.0% previously.
With the government expected to issue more debt to fund its initiatives to steer Malaysia towards recovery, MGS yields along the belly till the long end of the curve should be subjected to most of the upward pressure. At the short end, however, yields should be capped by BNM's accommodative monetary policy to complement fiscal stimuli.
We do not expect the possible move by the EPF to trim down its MGS holdings. In November, yields had spiked in a knee-jerk reaction towards the EPF's statement that it may need to offload its assets to fund i-Sinar withdrawals. In any case, EPF had been gradually trimming down its MGS holdings, down from 29.8% of total outstanding in 1Q2020 to 25.4% in 3Q2020. Despite this, MGS yields had continued to trend downward over this period as local banks and foreign investors increased their stakes. We believe that Malaysia has ample liquidity to buffer any sell-off activity by the EPF.
A full report of the Bond Market Outlook 2021 can be accessed here.
Tan Jack Fong, +603-2717 2958/ firstname.lastname@example.org;
Quah Boon Huat, +603-2717 2931/ email@example.com;
Firdaos Rosli, +603-2717 2936/ firstname.lastname@example.org.