FW: CIMB Fixed Income Daily - 04 Jun 2018 - Index followers boost MY govvies

 

 

CIMB Fixed Income Daily - 04 Jun 2018 - Index followers boost MY govvies 

 

US Treasuries weakened on less safe haven demand as players noted that early elections would not be required in Italy and Spain. In Italy, president Sergio Mattarella approved the M5S-Lega coalition government whilst in Spain though Mariano Rajoy has been forced out via a no-confidence vote its Prime Minister Pedro Sanchez has not call for an election for now. Meanwhile, Trump said US-North Korea meeting will still take place as planned in Singapore on 12 Jun. Of course, important driver for weak UST Friday was non-farm payrolls for May 2018 at +223k against 190k consensus. However, the Apr NFP was cut down to +159k from +164k previous estimate. The unemployment rate fell to 3.8% from 3.9%.

 

Thai bond curve continued bull-flattening Friday with strong bids at long-ends led by LB316A, LB326A, and LB366A. This pressured yields 3-6bps down within 13-18y segments. After Thai headline CPI accelerated to 1.49% yoy in May, or the fastest pace since Jan 2017, due to higher fresh food and energy prices, front-yields did not decline with longer-term yields while increasing inflationary pressure signals limited policy space to maintain low interest rates. Core CPI grew 0.8% yoy the same month, or the highest since Aug 2016 reflecting pick-up in domestic demand.

 

Malaysia’s government bonds moved firm. Players have noted of suspected foreign interest slanted towards MGS or GII papers which are included in the various international or regional bond indices. This suggests longer-term foreign investors who track the returns of international bond indices are again picking up Malaysian bonds. We maintain upbeat outlook on MGS in the short to medium term.

 

To recap, sentiment in the Malaysian bond market was cagey since early May 2018 as players were still debating policy direction of the new government, and how this could affect the MYR currency and sovereign credit. The main concern was fiscal impact from the implementation of the new government’s key election proposals such as the abolishment of the goods and services tax (GST) and re-introduction of fuel subsidies. However, on the last day of May, the new government via MOF Lim Guan Eng came out to share its target numbers. We are positive on the details coming out of the MOF and which should aid sentiment in the Malaysian bond market at least in the short term horizon. The MOF said the country is on pace to meet already targeted 2.8% of GDP fiscal deficit for this year. The target deficit in ringgit terms is anticipated to show a small increase to RM40.1b against RM39.8b prior target.

 

This forecast takes into account targeted extra revenue of RM5.4b due to higher oil prices (than estimated in 2018 Budget). MOF also said there’ll be additional RM4.0b revenue from the planned sales tax, and RM5.0b added revenue from higher GLC dividends. This scenario as presented by MOF, supplants our earlier expectation of a conservative baseline scenario which would have still seen a manageable deficit expansion. Based on 1) implementation of sales and services tax (SST), 2) oil-related revenue above the previous government’s assumption of US$52/bbl in Budget 2018, and 3) cuts at the Prime Minister’s department (could amount to slightly over RM5b as our base case), the impact would be an additional 0.7% to the fiscal deficit, raising the deficit-to-GDP ratio to as high as 3.5% in 2018 versus the projected 2.8%. This conservative level still would not exceed Malaysia’s historical range (10 year range of -6.7% to -3.0%, during which Malaysia’s sovereign credit rating remained unchanged).

 

CIMB Treasury & Markets Research-Fixed Income

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