Zeti Akhtar Aziz, governor of Bank Negara
How would you describe 2002 in terms of capital raising for Malaysia?
As a matter of policy, priority has been given to raising finance domestically as part of our efforts to develop the ringgit bond market in Malaysia.
But Malaysia also considered it important to have a presence in the international capital market. We take an opportunistic approach in raising funds from the international capital market and, given the low interest rate environment, this year was a favourable time to arrange international financing.
As a result the government re-opened Malaysia's $1bn 7.5% 2011 issue at a yield of 6.8%, 90bp lower than the initial yield of 7.7%. Then in June we launched the first Islamic sovereign global security, a $600m five year deal.
What was the government's strategy and goals in terms of capital raising for 2002?
In the 2002 budget, the financing requirement of the government was estimated at M$16.6bn. As part of its strategy to develop the domestic bond market, the government has regularly issued securities with maturities of three, five and 10 years to meet demand and to generate a benchmark yield curve.
During the year, greater market transparency was facilitated by the announcement of an auction calendar on the issuance of government securities for 2002. The government's strategy is also to develop the secondary market by raising funds through re-opening existing Malaysian government securities (MGS) to enhance liquidity. In the first eight months of 2002, two existing MGS, due in 2005 and 2007 respectively, were re-opened for a total of M$6bn.
Due to the country's low external debt position and the favourable external environment, the government also arranged the two dollar issues in the first half. The government considered cost, overall debt and currency exposure, establishing a market presence and benchmarks for the corporate sector and finally the need to achieve a diversified investor base.
What were the biggest challenges that you faced in trying to meet your funding objectives?
Although fiscal deficits have been recorded since 1998, the operating account has always been in surplus. The financing shortfall is used to finance development expenditure.
Sourcing finance from abroad to help meet this is always an option. The main challenge is for the financing to be cost effective and to maintain a currency exposure that is manageable, given the increased volatility of the major currencies in the recent years. The bonds also need to reach a wide investor base and provide a benchmark for Malaysian corporates.
Malaysia has gained rating upgrades from both Fitch and Standard & Poor's in the past two months. Would you expect an upgrade from Moody's as well in the near future?
Malaysia generally meets the international rating agencies biannually, once in the first half of the year and then again in the second half of the year. As further progress continues to be made on all the key important areas in the economy and areas of risk and vulnerability are addressed, our expectation for Malaysia's ratings remains favourable.
How much have the rating upgrades improved Malaysia's ability to issue in the international bond markets?
During the Asian financial crisis, the rating agencies were quick to downgrade Malaysia's sovereign credit ratings, even dropping the rating by two notches in a single revision at times.
When economic and financial conditions improved, the upgrades tended to be more gradual, occurring only towards the end of 1999 despite the speed and magnitude of Malaysia's recovery and the progress that was achieved.
In contrast, the financial markets were faster to price the positive developments, as evidenced by the narrowing of Malaysian bond spreads and the return of portfolio inflows into Malaysia before the rating agency upgrades.
So while rating upgrades would improve spreads, the absence of upgrades has not impaired Malaysia's ability to raise international debt.
Is Malaysia hoping to be upgraded again in the next year or two?
We believe that solid foundations have been put in place and that Malaysia will continue to strengthen economic and financial conditions and so provide a positive outlook for our credit standing.
Why did the Malaysian government decide to launch its first ever dollar denominated Islamic bond this year?
The objective of the first Islamic issue was to provide an impetus for the development of the Islamic financial market on a global basis. Apart from creating a benchmark for other similar deals, it presented a new asset class to Islamic and conventional investors. The issue was also intended to act as a catalyst for accelerating the development of the International Islamic Financial Market, which was launched early this year.
Are you encouraging state affiliated or blue chip Malaysian companies to follow with similar international Islamic deals?
The inaugural global Islamic sukuk issue has paved the way for similar issues from a broader spectrum of borrowers including government linked agencies and blue chip corporates in Malaysia.
Companies are encouraged to consider international Islamic deals as a new structure to raise financing, but they can select the funding method that best meets their purposes.
Why has Malaysia arranged only dollar denominated bonds in the international public market this year?
When accessing the international capital market, the government makes an assessment about the alternative currencies in which the funds could be raised. For this purpose, analysis on the long term direction of currencies, FX volatility and exposure and the need to establish a reference pricing are all considered. In the final analysis, the currency choice has to be opportunistic in terms of the cost advantage to Malaysia.
How do you choose your lead managers?
We have generally appointed one of the major investment houses. The choice generally depends on the structure of the deal and the specific market in which the bond is issued.
How important a role will the ringgit bond market play in both state and private fund raising in the future?
The ringgit bond market has always been an important source of financing for both the state and private sectors, especially for the financing of long term projects. We expect that the ringgit bond market will evolve further and remain an important source of financing.
Efforts are being taken to develop the market and provide a competitive source of long term debt funding and viable investment alternatives as well as promote greater diversification for portfolio management.