Published on 30 Aug 2018.
The domestic corporate bond market remained relatively healthy in 1H 2018, despite much economic volatility and uncertainties following a historic change of government in Malaysia. Corporate bonds and sukuk issued in 1H 2018 amounted to RM55.7 billion (1H 2017: RM54.8 billion; 2017: RM124.9 billion). Of this, 56% comprised rated bonds, with 85% (by value) or 104 issues carrying RAM-assigned ratings. The bulk of the RAM rated bonds originated from financial institutions (48%) and the infrastructure & utilities sector (17%).
In the period under review, the rated credits in RAM’s portfolio stayed healthy; 81% issues retained AA or higher ratings while 90% had a stable outlook. Of the remaining 10% portfolio that experienced a change in rating (both published and unpublished), 7 issuers were downgraded in 1H 2018 while none was upgraded. This led the net rating action (or rating drift) to remain negative as at end-June 2018.
There are however, signs of a possible upward momentum in the coming quarters, as indicated by the decline in issuers placed on negative outlook and the concurrent increase in those put on positive outlook in 1H 2018. A change in rating outlook typically – although not always – precedes a rating change in the next 12-18 months. As at end-June 2018, the ratings of 7 issuers carried a positive outlook (up from 4 as at end-December 2017), in contrast to 11 with a negative outlook and on rating watch (end-December 2017: 14). Although the trajectory may be improving, the overall rating drift is likely to remain negative by end-2018, as the number of downgrades would likely exceed upgrades.
Going forward, we remain optimistic about Malaysia’s economic resilience, although downside risks could moderate growth and the expansion of the domestic bond market. In particular, fund-raising activity by quasi-government entities may be contained by the Government’s review of large infrastructure projects and contingent liabilities. External risks stemming from further rate hikes by the US Federal Reserve, mounting trade tensions and risk aversion to emerging markets could drive yields further up. That said, we expect bond issuance to be sustained at RM90 billion-RM100 billion in 2018, underscored by capital augmentation by financial institutions and private-sector infrastructure expenditure - the two anchors of ringgit bonds and sukuk in Malaysia. Meanwhile, MGS/GII issuance is likely to remain at our earlier forecast of RM100 billion-RM110 billion for the year.
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