KUALA LUMPUR (May 15): Malaysia could realise more than RM170 billion worth of inflows, or a 71% increase in foreign holdings of government bonds, said Malaysian Rating Corporation Bhd (MARC).

In a statement, MARC said this is based on the assumption that foreign holdings of Malaysian bonds increase from the present 21%, to the historical high of 36%.

The statement said since 2005, the foreign share of government bonds had ranged from 4% to 36%, with the latest being 21% as at April 2024.

“At 21%, foreign holdings are near the long-term average, suggesting that foreign investors have retained their interest in Malaysian government bonds, despite currency volatilities caused by pivotal shifts in global interest rates.

“While foreign holdings are below the 10-year average, there is no evidence of capital flight from Malaysia surpassing historical norms,” it said.

Year to date, Malaysia’s capital markets have witnessed net foreign outflows, recording RM4.0 billion outflows in the local bond market and RM2.1 billion outflows in the domestic equity market as of April.

This further highlights the importance of market microstructure factors to bolster the persistence and increase of portfolio investments.

MARC reckoned that several steps could be taken to continuously enhance Malaysia’s structural attractiveness as an investment destination, including improving Malaysia’s country risk and sovereign credit rating, raising the openness of market access, and increasing market size and liquidity.

“Market access includes wide-ranging criteria, such as a simple and consistent foreign exchange policy, an easy registration process for international investors, ready access to a liquid derivatives market with multiple product types, lowered tax and transaction costs, and efficient settlement and custodial systems,” it noted.

An ongoing debate concerns whether Malaysia’s overseas investments have contributed to the depreciation of the ringgit.

Malaysia's net international investment position (NIIP) has consistently remained positive since 2008, reaching 6.6% of gross domestic product in 2023, indicating that Malaysia has more foreign assets than liabilities.

“While the immediate effect of overseas investments causes outflows, a stable and structurally positive NIIP bolsters Malaysia’s ability to withstand external shocks, demonstrating creditworthiness, access to global capital markets, and the potential for future returns on investments,” it added.