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.