KUALA LUMPUR (July 16): Malaysian Rating Corp Bhd (MARC) said the fiscal support to mitigate the impact of stricter lockdown measures caused the gross issuance of Malaysian Government Securities (MGS) or government investment issues (GII) to rise 3.5% year-on-year (y-o-y) to RM80.5 billion in the first half of 2021 (1H21), resulting in a steepening of MGS yields.

In a note today, the rating agency said based on the current developments, it expects the gross issuance of MGS/GII to come in between RM170 billion and RM180 billion for 2021.

"This would be the highest annual gross issuance amount in recorded history. Failure to contain the pandemic, however, will necessitate increasing further the supply of MGS/GII to finance economic support measures in the near term.

"Assuming that total fiscal direct injections reach 2020's RM55 billion, gross issuance of MGS/GII this year could reach between RM200 billion and RM210 billion," MARC said.

"Concerns have been raised over the government's weak finances and high debt. Given the dire economic and social impact from prolonged lockdowns, we think that the government has limited policy options at hand. Spending on economic support measures should continue amid a negative output gap.

"As a developing economy, we believe that fiscal austerity can only add further damage to Malaysia's economic and social fabric, and subsequently our long-term economic progress. While many other nations find themselves in the same fiscal boat as Malaysia, the government should be bold in securing the nation's future prosperity," said MARC.

According to MARC, the yields along the 7 year-20year curve surged by between 62 basis points (bps) and 79bps, while yields along the 3 year-5 year curve surged by between 38bps and 43bps.

"Notably, the expectation of declining buying support from the Employees Provident Fund (EPF) has caused yields to rise," said MARC.

It said MGS yields have been rising on a steepening bias across all tenures in recent weeks, and with the ongoing debates around tapering programmes from global central banks, heightened inflationary pressure, growing new supply of MGS, and waning buying support from EPF, the trend should continue for the rest of the year.

Benchmark yields on the 10-year MGS are expected to reach between 3.5% and 3.6% for 2021, said the rating agency.

On the other hand, the gross issuance of corporate bonds is also on an uptrend. The gross issuance rose 53% y-o-y to RM59.5 billion in 1H21, which the agency said was partly due to the historical low overnight policy rate of 1.75%, which has been in place since July 2020, as well as the expectation of an economic rebound.

It expects corporate bond issuances to likely come in between RM100 billion and RM110 billion for 2021, versus RM104.6 billion in 2020, assuming the prospects of an economic recovery remain intact and a continued rise in business confidence and private investments.

However, it said it is important to note that risks remain tilted to the downside given the spike in Covid-19 cases and prolonged tight lockdowns, adding that there is huge dependence on the ongoing vaccination programme and the overall impact of fiscal stimulus packages.