PETALING JAYA: The Government is expected to sell more sovereign bonds going into 2011 despite expectations of a further narrowing of the budget deficit next year.

Both Malaysian Rating Corp Bhd (MARC) and RAM Holdings Bhd expect the Government to issue some RM90bil debt securities next year.

"The Government is expected to issue up to RM90bil debt securities to cover RM49bil debt issues maturing next year and financing of the RM45bil deficit estimated by the Finance Ministry. The projected amount is 40% higher than the RM64.4bil issued in 2010," RAM chief economist Dr Yeah Kim Leng told StarBiz.

"Investors' appetite remains undiminished for sovereign bonds of most Asian countries, which have strong fundamentals and are experiencing robust domestic demand-led growth," he said.

He said the eurozone debt crisis had "cast a pall on the outlook of other sovereign bonds", especially those issued by countries which are saddled with high fiscal deficits and government debts. These countries also face weak growth prospects.

According to Yeah, strong global demand for higher-yielding sovereign bonds of emerging economies was stoked by low interest-rate regimes and excess liquidity unleashed by loose monetary policies across the developed world.

Of particular concern for emerging economies is the impact of the quantitative-easing programme of the US Federal Reserve over the next few months.

"While credit risk continues to improve for emerging markets' sovereigns, the demand pressure will be exacerbated by large capital inflows, driving yields lower," Yeah said.

MARC noted that although the country's budget shortfall was expected to be trimmed to 5.4% of nominal gross domestic product, the absolute amount of RM45.5bil was actually more than the RM43.3bil recorded in 2010.

This was on the back of Government anticipation for the economy to grow by 5% to 6% in 2011.

"Additionally, there will be RM45bil worth of Malaysian Government Securities (MGS) and government investment issues (GII) maturing in 2011, higher than that in 2010, which would translate into more issuances in 2011.

"Given the projected budget deficit and estimated maturing amount, financing needs should be about RM90.5bil," MARC said in a report.

It expected gross financing requirement of RM90.5bil in 2011 to be almost 50% more than the RM60.5bil seen in 2010.

Nevertheless, it is worth noting that half of this amount is actually for the refinancing of maturing debt securities.

Net issuance would only increase by RM6.4bil to RM41bil.

"Based on the 2011 MGS/GII issuance calendar announced by the central bank recently, there will be a total of 29 sales in the coming year (of which eight will come via private placements) compared with 19 sales recorded in 2010."

MARC's estimate shows that the weighted average financing cost of the existing bonds maturing in more than seven years is about 4.56%, and at the time of writing, the seven, 10 and 20-year benchmarks were yielding 3.79%, 4.00% and 4.18% respectively.

It said foreigners were once again expected to be the net buyers for most of the year, as it was unlikely that interest rates in developed nations would increase anytime soon, with markets currently looking at the fourth quarter of 2011 as the earliest turning point in their respective monetary policies.

Yeah concurs with MARC. He said there was a strong likelihood that foreign purchases would rise further, as capital flows to emerging markets were projected to increase strongly following the quantitative easing mounted by the Federal Reserve.

On corporate bonds, MARC said 2010 had been undeniably quiet with extremely modest issuance in the earlier part of the year despite a rebound seen in the global bond market.

"The dry spell in primary market activities appears to have ended, judging from the pick-up in bond issuance in the second half of 2010," it said.

MARC has revised its 2010 corporate bond issuance target lower to RM38bil for the full year compared with RM35bil-RM45bil earlier due to lethargic environment.

- The Star Online