Proud Malaysia edges towards mainstream

Proud Malaysia edges towards mainstream

By Nelson Graves

KUALA LUMPUR (Reuters): Defiant Malaysia has taken a major
step towards rejoining the global financial mainstream with a
US$1 billion bond but some investors remain wary towards a
country that burned them last year with capital controls.

Malaysia sold $1 billion in 10-year global bonds on Wednesday,
its first sovereign issue in nine years.

Demand for the issue was about $3 billion.

But Kuala Lumpur, which had initially targeted $2 billion,
decided to trim the offer given "widened spreads and the
potential for continued unstable market conditions," Finance
Minister Daim Zainuddin said.

Flush with foreign reserves and official loans for its
recovery program, Malaysia is not desperate for money.

Emerging market debt spreads widened after the U.S. Federal
Reserve last week indicated a change in bias towards higher
interest rates, prompting Malaysia to trim the offer.

"The timing was slightly off," a dealer with a Malaysian bank
said. "Firmer U.S. rates were not expected when the timing was
planned. It would have been great a month ago."

The issue marked Malaysia's successful return to the global
capital markets after a year of uneasy relations.

Kuala Lumpur canceled a $2 billion bond offer last year after
sovereign downgradings by Standard & Poor's and Moody's.

Prime Minister Mahathir Mohamad later attacked the rating
agencies, calling them "greedy and arrogant", and then thumbed
his nose at foreign portfolio investors by slapping controls on
capital flows and pegging the ringgit currency.

Many of those investors had doubted Malaysia's ability to tap
the global capital market. "Today's successful issue proved them
wrong," Second Finance Minister Mustapa Mohamed said.

Malaysia's economy is expected to rebound this year after its
first recession in 13 years in 1998.

International reserves equal to 6.5 months of retained
imports, a burgeoning trade surplus and a bull run on the stock
market lured investors to its benchmark bond.

The oversubscription reflected "the confidence of investors in
Malaysia's credit standing and strong prospects of economic
recovery", Daim said.

The issue was priced at 330 basis points above comparable U.S.
Treasuries to yield 8.862 percent. Malaysia had targeted a spread
of about 225 points.

"For a country which is not under an IMF package, our
performance is not too bad," said K. Sree Kumar, executive
director of KAF Refco Futures Sdn Bhd in Kuala Lumpur.

The spread had narrowed to 300 points by Thursday morning, 20
points inside of a 2006 global bond issued by state-owned oil
company Petroliam Nasional Bhd.

But South Korea's 2008 global bond, viewed as the benchmark
for Malaysia, was at 225 basis points. That deal was trading
close to 200 points over Treasuries before the Fed's shift.

Bond dealers attributed the differential between the Malaysia
and Korean bonds to lingering concerns over Malaysia's economic
policy and the tense political outlook.

"It's a good start," said Patrick Tan of ABN Amro Asia Equity
Research in Kuala Lumpur. "The spread over Korea's bond suggests
perception is still cautious at the moment."

Mahathir's fulminations against foreigners and the capital
controls have left a bad taste in many investors' mouths. The
jailing of former finance minister Anwar Ibrahim, who stands
trial for a second time next month, still rankles many.

Duff & Phelps said this week that "uncertainty regarding the
future of Malaysia's economic policies continues to constrain the
ratings".

Financier George Soros, long a thorn in Mahathir's side, was
blunt last week: "I am very much concerned by the lack of
democracy in Malaysia."

"Either you like Malaysia or you won't have anything to do
with it," said a bond trader in Singapore.

"People are polarized. Some say it is a basket case and they
will not touch Malaysia because of Mahathir. Others like the fact
it is under control," the trader said.