MARC expects issuance of MYR75-90 billion in gross private debt securities (PDS) for 2013, with another MYR90-95 billion of gross issuance in Malaysian Government Securities (MGS) and Government Investment Issues (GII). Within the PDS market, MYR55-65 billion should be in the rated category while the remaining MYR20-25 billion will be in the non-rated Government-Guaranteed category.

Projects under the government’s Economic Transformation Programme (ETP) will be the main catalyst for corporate bond issuance. While private debt issuance in 2013 is expected to be lower than the level of issuance in 2012, last year saw a number of one-off mega-issues that boosted the numbers. For the public sector, fiscal consolidation through the government’s commitment to reduce the fiscal deficit over the medium term will cap growth in issuance of government securities. MARC, however, expects continued expansion in the Government-Guaranteed segment, again largely due to projects under the ETP.

On the demand side, growth in investible funds via the Employees Provident Fund, insurance companies, unit trusts and pension funds should see the level of issuance comfortably absorbed by the market. Sustained foreign investor interest in Malaysia’s debt market means that the large stock of domestic savings will continue to be bolstered by foreign capital.

The increase in domestic liquidity represented by foreign capital has also increased the demand for bonds, lowering effective yields and compressing spreads across the risk spectrum over the past couple of years. Expansionary and unconventional monetary policies in advanced economies have substantially boosted global liquidity and at the same time reduced yields on debt instruments in the developed world.

The resulting wave of liquidity has led to demand spilling over into emerging markets such as Malaysia where yields have been more attractive. At the same time, this increase in demand has the potential for distorting domestic market conditions and price signals. MARC believes that in consequence, credit risk may not be properly priced into the market and investors should become more discerning going forward. That, and expectations that inflation will begin to pick up in the second half of 2013, should see yields rising and spreads widening toward the end of the year.

The major risk factors to this outlook are uncertainty over the US fiscal position which could halt the momentum of its economic recovery, a deeper-than-expected recession in Europe which will have repercussions globally and domestic political uncertainty arising from the soon-to-be called General Election in Malaysia.

Overall, even taking into account these major tail risks, MARC foresees continued growth and development in the domestic debt market.

For a copy of MARC’s 2013 Bond Market Outlook Report, please click  here.