ABOUT US$8 billion (RM33 billion) would flow out of Malaysia if its bonds are downgraded by global index provider FTSE Russell, said Morgan Stanley in a research note.

FTSE Russell on Monday said it would review Malaysia’s market accessibility level in its World Government Bond Index (WGBI) due to concerns about market liquidity.

Malaysia is currently assigned a ‘2’ and included in the WGBI since 2004, but was being considered for a potential downgrade to ‘1’, making it ineligible for inclusion, according to FTSE Russell.

Two weeks ago, Norway’s US$1 trillion sovereign wealth fund announced that it would cut emerging-market bonds from the benchmark index it tracks – that includes Malaysia’s bonds.

FTSE Russell stressed that the decision to add Malaysia on the watch list was “not a guarantee of future action”.

Therefore, Malaysia could continue to remain on the WGBI and avoid a downgrade. However, the requirement was for the country to fulfil the WGBI eligibility criteria at the upcoming review in September 2019.

FTSE Russell added that it would engage with local regulators and market participants to assess the potential changes to the country’s classification.

The Star reported that bond market experts said Malaysia’s potential exclusion from the global index could be avoided if the government addresses the concerns of index managers and raise market confidence.

The daily quoted one such expert as saying that FTSE Russell’s decision to put Malaysia on the watch list would lead to knee-jerk reaction from the market. However, he added that any negative reaction would probably be temporary.

“Investors in the Malaysian bond market should not be worried about this unnecessarily. WGBI is not the only bond index provider, there are also others. I just hope the move by FTSE Russell won’t trigger other index providers to move in the same direction. Malaysian bonds are attractive in terms of liquidity,” he said.

The news of Malaysia being on FTSE Russell’s watchlist saw an immediate affect on the ringgit. On Tuesday, it lost 0.5% against the US dollar and at midday today, the currency was down 0.3% against the greenback at 4.1435.

Foreign investors have been reducing their Malaysian government bond holdings since late 2016 and, as of late March 2019, held US$37 billion, reported Reuters. – April 17, 2019.