KUALA LUMPUR: Malaysia could see over RM170 billion in capital inflows, marking a substantial 71 per cent rise in foreign investment in government bonds.
This, however, will be the case when the share of foreign holdings in Malaysian bonds increase from the current 21 per cent to the historical high of 36 per cent.
According to Malaysian Rating Corporation Bhd (MARC), raising the level of interest in the Malaysian capital markets requires a multi-year strategy of aligning with international frameworks.
Giving example, MARC said although Malaysia was initially admitted to the FTSE World Government Bond Index in April 2004, it required several years and the subsequent admission to other bond indices before foreign holdings of government securities approached the 20 per cent level in 2010.
"Furthermore, when foreign holdings exceeded 30 per cent of the outstanding bond market in 2015, this was accompanied by favourable external conditions, whereby Malaysia had a substantial interest rate spread of 300 basis points above the US, while Malaysia's key commodity exports' prices were rising," it said in a note today.
Since 2005, the foreign share of government bonds ranged from 4.0 per cent to 36 per cent, with the latest being 21 per cent as at April 2024.
MARC said at 21 per cent, 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.
"Nonetheless, further foreign capital inflows would be beneficial to Malaysia," it added.
MARC said several steps could be taken to continuously enhance Malaysia's structural attractiveness as an investment destination.
First is to improve Malaysia's country risk and sovereign credit rating.
The country must also enhance the openness of market access and increase 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.
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 said.
An ongoing debate concerns whether Malaysia's overseas investments have contributed to the depreciation of the ringgit.ë it added.
Malaysia's net international investment position (NIIP) has consistently remained positive since 2008, reaching 6.6 per cent of gross domestic product (GDP) in 2023, indicating that it possesses 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.
"However, sustaining a positive NIIP requires continued accumulation of foreign reserves and CA surplus," said the rating agency.