Oil subsidy rollback set to help region-beating Malaysian bonds

MALAYSIA’S bonds beat all their regional peers last quarter, as rising oil prices bolstered the government’s coffers. The expected rollback of oil subsidies in next week’s Budget announcement may provide another updraught.

Bonds of the oil-exporting nation returned a relatively small loss of 0.7 per cent in the three months to September amid a torrid period for global debt markets. In comparison, their counterparts in Indonesia slid 3.6 per cent, while in Thailand they tumbled 5.7 per cent.

Malaysia’s government has been talking about plans to lower oil subsidies for some time to reduce its budget deficit. The 2024 Budget announcement on Oct 13 will reveal a “concrete move” away from the current blanket subsidy system, Economy Minister Rafizi Ramli said on Bloomberg Television on Wednesday (Oct 4).

The decision may generate savings of at least US$1 billion to US$2 billion a year, he added.

A smaller budget deficit would open up the prospect of a reduction in debt issuance.

Net bond supply is expected to be RM86 billion (S$25 billion) in 2024, versus a forecast of RM91 billion this year, said Winson Phoon, head of fixed-income research at Maybank Securities in Singapore. Some targeted fuel subsidies “may be confirmed in Budget 2024 to compliment fiscal consolidation”, he said.

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For every US$10 per barrel increase in the price of oil, the government receives an estimated RM8 billion in revenue, while having to spend around RM6 billion in its blanket fuel subsidies, according to a note from Maybank this week. 

A reduction in bond supply would be good news as demand at recent auctions has been faltering. The average bid-to-cover ratio at the sales of five-year Islamic notes and 30-year conventional bonds last month was a combined 1.93 times, versus the 2023 average of 2.11. An auction of 2042 conventional notes on Thursday drew a cover of only 1.77 times.  

Bond supply issues have dogged other South-east Asian debt markets in recent months.

Thai 10-year yields have jumped more than 60 basis points since the end of July, largely on concern new stimulus measures will require greater bond issuance. Indonesia’s yields jumped this week after the government announced a significantly larger debt supply this quarter than a year earlier.

There may be one potential downside from any Malaysian decision to scale back fuel subsidies: faster inflation. Still, Malaysia’s consumer prices rose just 2 per cent in August year on year, down from 3.8 per cent at the end of 2022, meaning there is plenty of room to absorb a bit more inflationary pressure without unsettling debt markets. BLOOMBERG