Anticipate larger supplies in 2017 but lessens pressure off the front of curve

Anticipate larger supplies in 2017 but lessens pressure off the front of curve

• Malaysia’s Budget 2017 unveiled 21 Oct 2016 indicated the federal government’s targeted fiscal deficit of 3.0% of GDP for fiscal year 2017, in contrast to a deficit of 3.1% of GDP estimated for 2016 and 3.2% in 2015. Based on the projected numbers, the 2017 fiscal deficit will require financing of around RM40.3 billion, which is higher than RM38.7 billion and RM37.2 billion for 2016 and 2015, respectively. Adding on upcoming 2017 maturity of MGS and GII of RM66.8 billion translates into a possible gross domestic government bond issuance of up to RM107.0 billion in 2017. Hence, we assume a potentially larger supply from the primary side in 2017, in contrast to RM86.0 billion and RM92.5 billion each in 2016 and 2015.
• The 2017 government bond auction calendar comprises a total of 32 offerings (2016: 29 offerings), which include 16 MGS (15 in 2016) and 16 GII (14 in 2016) auctions.
• Partly due to the heavy-load on short term maturities in the current MGS+GII portfolio [Exhibit 4], 3-year benchmark offerings will be thin in 2017 with only one (1) for each MGS and GII. This lessens pressure off the front of the yield curve, and supports our view of a steeper MGS curve in 2017.
• We expect the government to continue to dish more supplies on the 5-10 year tenors, to avoid further concentration on the front end of the curve. On top of that, Bank Negara is also likely to extend portfolio duration into the 15-20 year segments, which has relatively smaller sizes compared to the 5-10 year maturities [Exhibit 3].
• There will be RM22.3 billion worth of government securities maturing in 1H2017, and another RM44.5 billion maturing 2H2017 [Exhibit 2]. Despite that, the primary market should a shade larger 1H2017. We anticipate the government to provide larger offerings in order to provide liquidity for the new benchmarks which auctions are stacked towards 1H2017.
• The 30-year GII will be introduced for the first time. In our opinion, it is the authority’s effort in providing a benchmark to aid longer term sukuk pricing.
• We note that the government auctions were pretty diversified into both MGS and GII in 2016 (50.6%: 49.4%), compared to 2015 (55.7%: 44.3%) and 2014 (60.4%: 39.6%). Hence, it is possible that the primary supplies to see a balance 50%:50% in 2017, or even slightly higher allocation for GII papers.
• In Exhibits 5, we compiled a list of key fixed income investors. In 2017, government bond maturities surmount to RM66.8 billion, and the crux of this should be reinvested. In addition, we anticipate new monies likely to be allocated by key investors to be invested into Malaysian government bonds to be at least RM19.9 billion in 2017, down slightly from 2016’s estimated RM20.0 billion. The sum of two sources of monies (reinvestment and new monies) add up to RM86.7 billion and will make the bulk of the genuine demand for new government bonds auction in 2017 (expect to surmount to around RM107.0 billion). The RM86.7 billion is made up of demand from insurance companies and the EPF only; the figure does not take into account participation from other major players such as inter-bank participants and offshore investors.