International investors warm to Malaysia's US$2bil bond issue.

MALAYSIA'S first big bond offering since the 1997 financial crisis is getting a warm response from international investors.

According to a Reuters report from New York, investors evaluating the proposed US$2bil bond offering were looking past Prime Minister Datuk Seri Dr Mahathir Mohamad's strong words against foreign currency speculators to Malaysia's economic performance and the strong growth potential of the country's export-oriented economy.

"Malaysia's underlying credit story is impeccable," said Hari Hariharan, portfolio manager at New York-based NWI Investments.

Michael Cembalest, who invests in emerging markets for J.P. Morgan Investments, said: "Politics is no longer the governing issue when you look at investing in Malaysia. It has a high stock of domestic savings, very little external debt and an economy that is heavily export-oriented."

Money managers contend that despite his frequent criticisms of the West, Dr Mahathir, during his 17 years as prime minister, has transformed Malaysia from an agricultural economy to an industrialised regional power that grew at an annual growth rate of 8% for more than a decade.

Malaysia's main problem had been excessive domestic lending that led to an overbuilding of infrastructure such as roads and buildings, given the size of the economy, they said.

Yet that excess capacity had gone into infrastructure that would be used up as Malaysia's economy expanded, they noted.

Many money managers now even view Malaysia's imposition of controls on short-term capital flows in the capital account in September last year as an astute move.

Analysts also noted that Malaysia was maintaining the currency peg it established in September at RM3.80 to the US dollar.

"A lot of people believe Malaysia did the right thing," said Paul Dickson, analyst at Lehman Brothers Inc. "They avoided the worst kind of travesty."

Investors contend that had Malaysia let reserves deplete in defending the ringgit, it would have sunk into a spiral of high interest rates, high inflation and a severe recession.

"It is not intrinsically bad that Malaysia did not want the distortions associated with sterlising large inflows of capital," said Cembalest at J.P. Morgan Investments.

With the ringgit fixed, even a slight devaluation of the currency by Malaysia would reap huge benefits for exports, investors said.

Most money managers will reportedly evaluate Malaysia's US$2bil bond offering, likely to be in the 10-year maturity, using South Korea's sovereign bonds as a benchmark.

Standard & Poor's has rated both South Korea and Malaysia's foreign currency debt at triple-B-minus.

Moody's Investors Service ranks South Korea at Baa3, just one level above Malaysia's rating of Ball

"We would look at it (the bond offering), but we would want to see it priced at a reasonable spread to (South) Korea," said Michael Rosborough, portfolio manager at Pacific Investment Management Co.

Investors said that early indications were that Malaysia's bond issue would be cheaper than South Korea's, earning a higher yield for investors.

The offering, lead-managed by Salomon Smith Barney, was expected to yield about 25 to 30 basis points above South Korea's 87/8 bonds due 2008, which were trading at 218 basis points over comparable US Treasuries, traders said.

A basis point is 1/l00th of a percentage point. So a bond trading at 30 basis points above a 5.9% US Treasury bond would yield 6.2%. - Reuters

Arcticle extracted from The Star, Malaysia


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