CIMB Fixed Income Updates 01 Jul May 2015 - Fitch Affirms Malaysia!

Good morning,

• After a widely awaited annual review process, Fitch Ratings has affirmed Malaysia’ Long Term foreign currency Issuer Default Rating (IDR) at ‘A-‘ while revising the outlook from Negative to Stable. Fitch also affirmed Malaysia’s local currency IDR, at ‘A’, adding that the issue ratings on Malaysia’s senior unsecured local currency bonds are affirmed at ‘A’. The country celling is affirmed at ‘A’ and the Short Term foreign currency IDR is affirmed at ‘F2’.
• The rating agency cited the improving fiscal position of Malaysia, strong economic growth and low inflation as reasons for the affirmation and revision in rating outlook. We gather that Fitch’s idea of fiscal positives comprise fuel subsidy reforms and kick off of the GST in April this year. However, Fitch remains wary of Malaysia’s government debt levels, specifically contingent liabilities.
• In any case, markets were on the negative side viz Fitch’s rating on Malaysia. The ringgit had been in the doldrums not entirely due to the US Dollar strength, but a lot of negative sentiment had emanated from an earlier expected Fitch downgrade on the country. The USD/MYR was just shy off the psychological 3.8000 level (at 3.7932) on 29 Jun, and has recovered a tad to around 3.7415 on the Fitch announcement (even as USD remained firm against EUR, JPY and GBP as Greece finally defaults on its IMF loan). Volatility has backed in. The (1M) implied Ringgit vol is about 10.11 right now versus a spike towards 10.60 on 30 Jun.
• We see short term gains to as low 3.7000 for the Ringgit before shorts reappear.
• Short term, Ringgit government bonds should also be supported. The 10-year MGS (MGS Sep’25) was last heard at 3.954/907% after the prior day’s close of 4.02%. The 5-year IRS is down 4bps.