I had the pleasure of meeting with Adrian Wong, Investment Operations and Financial Market Department Manager at the central bank of Malaysia, Bank Negara Malaysia (BNM).
BNM fulfills the traditional roles of central banks around the globe and is mandated to promote monetary stability and financial stability conducive to the sustainable growth of the Malaysian economy. Their daily monetary operations are primarily to ensure liquidity in the banking system and ensure the average overnight interbank rate doesn’t deviate materially from overnight policy rate.
Adrian and I spent a portion of our meeting discussing the “dual banking system” that operates in Malaysia. The two segments of the banking system are: 1) the conventional system, and 2) the Islamic system. These two segments are treated separately but there are regular and significant flows between them and they share many common characteristics.
Credit ratings in Malaysia hover around the A- rating area. The 10-year Malaysian bond currently yields~4.1% and the 5 year sits at ~3.5%. Adrian noted there is strong demand for Malaysian government securities due to the impact of global index funds. Global and emerging bond indices from firms such as Barclays, Citibank, and JP Morgan all include Malaysian government bonds, so fund investors managing to the index benchmarks maintain exposure to Malaysian bonds.
The conversation returned to the dual banking system as Adrian explained they offer two types of government securities: 1) standard/conventional (Malaysian Government Security or "MGS") and 2) Islamic (Malaysian Government Investment Issue or “MGII”). Islamic bonds (sukuk) are primarily asset-backed paper based on Islamic law and tradition. MGSs account for approximately 60% of out standing Malaysian government bonds while MGIIs account for the other 40%.
Adrian noted that one initiative BNM is focused on is to ensure the indices which include Malaysian bonds are representing the actual Malaysian bond market as accurately as possible. Until late 2014, none of the indices included the MGIIs, effectively ignoring a significant 40% of the Malaysian government bond market. One of the major global bond indices, the Barclays Global Aggregate Index, now includes both the MGS as well as the MGII portion of the market. BNM is working to get the other major indices (Citi and JPM) to include MGIIs in their respective indices. This inclusion will create additional demand and liquidity for MGIIs in Malaysia. This will lead to tighter spreads and a more robust market for MGIIs which currently trade with higher spreads than the MGSs.
Like most central banks across the globe, BNM has an accommodative monetary policy at this point. Adrian explained that most emerging countries, including Malaysia, are facing heightened volatility in their respective markets… and it has to do with commodities and expectations of an impending US Fed rate hike. The global commodity slump has been a significant issue for Malaysia. Domestic demand in Malaysia is buffering some of the market shock, but their resource-sensitive sectors are suffering. Malaysia is an oil exporting nation. They also play a material role in semi-conductor manufacturing and is the world’s second largest palm oil producer after Indonesia.
Domestically, the construction and housing sectors are going strong. BNM watches housing closely and notes that it has been relatively stable.
We spent some time talking about banking institutions, regulations, pensions, institutional and retail investors, online brokerage options, and retirement in Malaysia. The discussion was brisk and we covered a lot of ground. Thanks again to Adrian for his time and insights.
Special thanks to Brennan Staheli, Daniel Doxey, and the Lunt Capital team for their contributions to this report.