KUALA LUMPUR (Jan 6): DBS Group Research expected Malaysia’s economic recovery momentum in 2022 to be among the strongest within the Asian region.
The country's growth prospects are stronger while its fiscal consolidation process is expected to be slower and more protracted than that of its regional peers, according to DBS Group’s rates strategists Duncan Tan and Eugene Leow.
According to them, a slower fiscal consolidation process means that government financing needs are likely to stay elevated for longer.
“2022 net government issuances are projected to be RM97 billion, very close to 2021's size of RM98.8 billion. Compared to 2021, duration supply pressures would in fact be higher in 2022 due to likely lower reliance on financing via Treasury Bills.
“This, in our view, is a recipe for relative underperformance of MYR [ringgit] rates, especially in the shorter tenors where hike pricing could have more room to rise.
“We thus initiate a relative-value idea against KRW [South Korean won] rates where we think BOK [Bank of Korea] hike pricing for 2022 is overly aggressive and should be faded — Pay 2Y [two-year] MYR [ringgit] IRS [interest rate swap] vs receive 2Y [two-year] KRW NDIRS [non-deliverable interest rate swaps],” they said in a note entitled ‘Asia Rates 2022: Growth Priorities vs Fed Concerns’ dated Jan 6 (Thursday).
Tan and Leow noted that monetary policy is expected to stay accommodative in the near term, and a pivot to a less dovish stance may only occur closer to the second half of the year.
Therefore, DBS Group factored in Bank Negara Malaysia’s (BNM) first interest rate hike in the third quarter of 2022 (3Q22), followed by two more hikes in 1Q23 and a pause thereafter for the rest of 2023.
“High vaccination rates and transition to endemic living should mean relatively lower risks of retightening of restrictions and by extension, limited downside risks to growth outlook, should more variants surface,” both added.
On bond demand dynamics, there is much uncertainty at this juncture, said the strategists.
As the economy continues to reopen, lending growth to the private sector would be expected to recover and consequently weigh on banks' demand for bonds. That said, it is difficult to forecast the timing and strength of such a recovery, they opined.
“Foreign buying would also be highly dependent on the global macro and liquidity backdrop in 2022, though MGS's [Malaysian Government Securities’] much improved FX [foreign exchange]-hedged yields should provide some marginal support for foreign interest. The one positive development we see on bond demand relates to the Employees Provident Fund (EPF),” they said.
EPF's bond buying capacity was constrained in 2020 and 2021 by more than RM100 billion of aggregate member withdrawals, associated with withdrawal schemes to support household consumption.
“In 2022, we expect that there will be no new withdrawal schemes introduced. Normalisation of the pension contribution rate to 11% around midyear and stronger economic growth this year should result in a fast rebuild of EPF assets and consequently, a pronounced rebound in the fund's buying of long-duration MGS.
“As a result, we think that a turnaround in EPF's demand will be the dominant factor anchoring long-duration MGS (eg 15Y and 20Y) and those bonds should outperform on the curve.
“Together with shorter-term MYR rates that are likely to rise with BNM hike pricing and weaker bond demand by banks, we think MYR rates curves will exhibit a clear flattening trend in 2022. To express this view, we initiate a long 20Y MGS vs pay 5Y MYR IRS,” the strategists added.