Posted Date : 24 Dec 2010
MARC released its 2011 Ringgit Bond Market Outlook report today which covers the agency’s views for both the domestic sovereign and corporate bond markets in the coming year.
Mohd Razlan Mohamed, MARC’s CEO, said, "We believe that the dry spell for the ringgit corporate bond market has ended after a relatively quiet 2010. MARC expects bond issuance to hit the RM50 billion mark in 2011 assuming the economy continues on its recovery path." He further added, "Public-Private Partnerships (PPP) are expected to play a catalytic role for corporate bond issuance in 2011."
The rebound in the domestic economy in 2010 from a recession the year before, aided revenue growth, improvement in operating margins and build-up of cash balances among corporates. This sets the stage for a general improvement in the credit quality of MARC’s rated universe, as evidenced by a lower year-on-year corporate default rate. Emerging Asian countries which played a crucial role in aiding the global recovery are expected once again to provide the silver lining with respect to sovereign and corporate bond issuance next year with their stronger economic fundamentals, sound financial positions and relatively healthier fiscal conditions. The emerging Asian countries are expected to remain attractive destinations for foreign funds due to huge positive rate differentials.
Investor confidence has somewhat improved judging from the narrowing corporate risk premiums observed for most of 2010, but this is confined to domestic bonds rated AAA and AA. The credit spreads along the lower rating bands have not returned to pre-crisis levels despite the economy coming out of recession. MARC believes that external credit enhancements by way of bank guarantees or financial guarantees will continue to play an important role in ensuring that the debt capital market remains accessible to this group of issuers.
Meanwhile, the agency also expects a higher amount of government bond issuance in 2011 to finance the government’s fiscal deficit and to refinance maturing debt. The government is likely to tap the retail market, replicating the success of its past savings bond issuance and in light of its announcement that the bond market will be opened to retail investors. MARC expects the gross issuance in 2011 to be in the range of RM85.5 billion to RM87.5 billion.
On the demand side, MARC envisages that foreigners will once again be the net buyers in 2011 as it is unlikely that interest rates in developed nations will increase anytime soon. The financial markets are currently looking at the fourth quarter of 2011 as the earliest turning point in their respective monetary policies. Additionally, the domestic market is still flushed with liquidity and the maturing proceeds are likely to be reinvested into the same asset class.
Although MARC is of the view that the risk of a European sovereign debt crisis is contained at this juncture, the agency would not completely rule it out from the risk scenario, going forward. If a contagion situation develops at a later stage, the flight-to-quality is likely to resurface at the expense of local currency sovereign bonds issued by emerging countries.
For a copy of MARC’s 2011 Ringgit Bond Market Outlook report, please click here to download the report.
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