Foreign portfolio investors say they are returning to Malaysia's markets, six months after many of them revolted against the central bank's crackdown on the offshore ringgit trading market.
Foreigners who had held about half of the outstanding Malaysian government bonds fled the market between November last year and March this year after Bank Negara Malaysia said they could no longer trade in ringgit non-deliverable forwards (NDFs). These are offshore contracts used to hedge exposure to the ringgit.
Bank Negara maintained its ban on ringgit trading in the NDF market, which it considers opaque, volatile and subject to abuse, even as it bled foreign exchange reserves defending the falling currency and as bond yields rose. Foreigners withdrew at least US$14 billion (S$19.4 billion) from Malaysia's bond markets between November and March.
By April, however, about 10 per cent of that money had come back into Malaysian government and central bank bonds. The data forlast month, due next week, is expected to show even more foreign outflows have returned.
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"A few weeks ago, when we saw this pattern of all big real money managers being very very underweight Malaysia, we saw that as a good time to be slightly contrarian," said Mr Jean-Charles Sambor of BNP Paribas Investment Partners in London. "Now we see that not only is the central bank willing to develop a credible onshore market, most real money guys are looking at ways to access the bond market. We think it's heading in the right direction."
Fund managers say, however, hedging exposure to the ringgit is not as easy as in other emerging markets, which offer the alternative of liquid offshore derivatives markets with barely any regulatory oversight.
Still, Bank Negara has worked to improve onshore trading. Malaysian exporters have been asked to bring home their earnings and foreigners are allowed to hedge all their exposures.
Bank Negara's forex reserves data shows it has pumped about US$19 billion worth of cash into the foreign exchange trading system to improve liquidity.
"The worst of the outflow pressure seems to be behind us now," Deutsche Bank analyst Sameer Goel said, adding that the improving economic environment was another reason to buy ringgit bonds.
Malaysian gross domestic product growth in the first quarter of 2017 hit 5.6 per cent over the same period a year earlier, driven more by a pick-up in domestic demand than the modest recovery in the price of the oil and gas that Malaysia exports.
Citi analysts said they were bullish, mainly because the ringgit was cheap and the authorities seemed inclined to let it appreciate.
Malaysia's distrust of the offshore currency derivatives markets is rooted in the Asian financial crisis. It forged its own path then too, as emerging markets suffered massive capital outflows and currency depreciation, pegging the ringgit to the greenback for seven years from mid-1998.
Kuala Lumpur rebuffed aid from the International Monetary Fund (IMF) after rejecting the IMF's conditions on restructuring its economy and emerged from the crisis stronger than its peers.
Traders said the Malaysian currency is slowly beginning to strengthen again onshore.
The ringgit has risen 5 per cent this year and was trading at 4.28 per US dollar yesterday. Against the Singdollar, it was trading at 3.10.