DUBAI: It was a one-two that turned the ringgit into Asia's worst performance this month.
FTSE Russell said Monday that it could lose the Malaysian debt of the FTSE World Government Bond Index due to concerns about market liquidity and the nation's currency and bonds.
Less than two weeks ago, Norway said that its state investment fund will remove emerging market debt, including Malaysian securities, from its index.
"In our opinion, the risk of dropping Malaysian bonds from the flagship index seems more likely than not unless fundamental changes are made to improve market accessibility in Malaysia," said Winson Phoon, head of the fixed-income survey at Maybank Kim Eng Securities Ltd in Singapore.
The move threatens to put more pressure on national markets, with the stock index underperforming every major benchmark in the world this year.
If Malaysia is dropped from the FTSE meter, the outflow of bonds can total almost US $ 8 billion (RM33.09 billion), based on the 0.39% weighting and the IMF's estimate that US $ 2 trillion (RM8.27) follows the index, says Morgan Stanley. .
The ringgit fell for a second day today and reached 4,1455 per dollar, the lowest since January 25.
Returns on the benchmark The 10-year loan increased by 4 basis points, while the stock index also declined for a second day.
Concerns about the liquidity of the market in Malaysia follow a ban from the central bank to trade non-deliverable forwards in 2016.
Bank Negara Malaysia then introduced measures to enable investors to hedge their currency exposure in an effort to restore confidence.
BNM said today that the volume in the FX forward market had doubled since it introduced the hedging measures in December 2016.
At the end of March, 70 non-residents and 17 resident investors with combined assets of US $ 31.2 billion (RM129.05 billion) had used the program to hedge, a statement said.
Substantial outflows of bonds can harm Malaysian stocks, which have a correlation of around 87% with the ringgit, Morgan Stanley analysts Sean Gardiner and Aarti Shah analyzed in a report.
Foreign outflows reached US $ 504 million (RM2.084.64 million) so far this year, most in Southeast Asia, compared to US $ 2.3 billion (RM9.51 billion) of government bond inflows, the analysts.
Euphoria on Malaysian shares disappeared after nearly a year after the surprise of the first election by Prime Minister Dr. Mahathir Mohamad in May, as the new government struggled with the debt obligations of the previous government.
The country's bonds had only capped a fourth month profit in March, expecting the central bank to lower interest rates as early as May.
Bank Negara Malaysia promised last month to keep monetary policy accommodative, as global risks weigh on the trade-relevant economy.
"The inflow of foreign bonds has recently supported the ringgit since the market started pricing a BNM interest rate cut at the next policy meeting," said Stephen Innes, head of trade and market strategy at SPI Asset Management.
"Even if the exclusion does occur, it should not have a noticeable effect on the ratings, so despite this unexpected shocker, it is probably a bit exaggerated, and I would expect cooler heads to prevail."
Foreign investors have lowered their Malaysian government bond positions since the end of 2016 and held around US $ 37 billion (RM153.04 billion) of securities from March. Min Dai, a Hong Kong-based strategist at Morgan Stanley, wrote in a report.