Budget 2010 positive for bond market

KUALA LUMPUR: Budget 2010 is positive for the bond market in view of the measures to rein in budget deficit through cuts in operating and development spendings to mitigate potentially lower revenue, fixed income analysts said.

The creation of new funds and larger issuances of private debt securities (PDS) promised a more vibrant bond market next year.

“Budget 2010 expects a smaller-than-expected fiscal deficit of 5.6% of gross domestic product (GDP) in 2010. This is way smaller than our earlier estimate of 7.1%,” said AmBank’s credit research and strategy.

The government planned to slash spending by 11.2 % to RM191.5 billion in 2010 from RM215.7 billion for 2009, against a backdrop of declining revenue. Of this amount, 72.2% or RM138.3 billion will be allocated for operating expenditure and RM53.2 billion or 27.8% for development expenditure.

“Consequently, gross Malaysian Government Securities (MGS) issuance is expected to come in lower at about RM64 billion in 2010 versus our earlier forecast of circa RM80 billion.

Correspondingly, we are also looking at a smaller net MGS issuance of RM40.5 billion versus circa RM55 billion based on our previous estimate,” said AmBank.

Assuming that RM10 billion of the gross issuance amount of RM64 billion would be placed out privately, next year’s auction size would likely average RM2.7 billion, it added.

Maybank Investment Bank fixed income research concurred, saying total gross funding required by the government in 2010 would be about RM64 billion.

The number of government auctions would be lower than in 2009, while auction sizes would also be smaller. While government bond issuances will be smaller in 2010, PDS issuances will be larger.

“The lower supply of govvies and the distribution of the auctions should keep the long end of the yield curve low. This will help spur borrowing activities by businesses which will then have a positive impact on the economy,” it explained.

Maybank IB said that by attempting to keep the yield curve flat, the government was hoping that more companies would borrow to fund their business activity, which would increase the amount of PDS issuances next year.

It also highlighted potential new PDS issuances in the budget to fund power projects in Pahang and Terengganu; privatisation of selected companies under the finance ministry and other government agencies; implementation of the High Speed Broadband project; public-private initiative; private sector projects in regional corridors and joint development with the government on land and buildings.

The research house also expected CONSTRUCTION []-related issuances given the government’s focus on infrastructure projects.

“The bond market is expected to further grow with the introduction of a new private pension scheme which will boost funds available for the bond market.

Besides that, the voluntary increase in employees’ contribution to the EPF from 8% to 11% and also the creation of 1Malaysia Retirement Scheme which will be administered by the EPF, will also add monies to the pension fund, a large portion of which will be used to purchase bonds,” it said.