Prime Minister Najib Abdul Razak’s budget revisions will give him an opportunity to build on initial successes in crisis management that have spurred a rally in government bonds.

The 10-year yield fell to the lowest since July this week as global risk aversion boosted demand for the relative safety of fixed-income securities, and overseas investors added to holdings for the past three months. The ringgit has fallen 2 percent this year, stabilizing after a 19 slump in 2015, and a measure of its expected volatility dropped the most in Asia in the past three months.

A slide in Brent crude to US$20 below Najib’s budget assumptions is prompting his government to rethink fiscal targets as revenue falls short for Asia’s only major net oil exporter, despite a new goods and services tax. PineBridge says the weakening ringgit gives a better entry level into Malaysian bonds and is looking to buy on dips. While Morgan Stanley Investment Management says longer-term yields are close to fair value, its outlook depends on what amendments the prime minister will make on Jan 28.

“Rather than exiting the bond market, we would look to use the ringgit’s weakness to increase our holdings,” said Anders Faergemann, PineBridge’s senior sovereign manager for emerging-markets fixed income in London overseeing about US$77.6 billion globally. “So far, the Malaysian bond market has been very resilient to the worsening global risk sentiment.”

For a government that’s run a deficit in its accounts since 1998, the focus will be on whether Najib maintains his goal of cutting the fiscal shortfall to 3.1 percent of gross domestic product from 2015’s 3.2 percent and if he adjusts policy. He’s seeking to balance the budget by 2020.

Despite a 44 percent plunge in Brent crude in 12 months to about US$27.49 a barrel, below the US$48 assumed by the government, the broadest gauge of Malaysian trade measured by the current account remained in surplus. It dwindled to RM5.1 billion (US$1.2 billion) in the third quarter from RM10 billion in the three months through March.

While HSBC Holdings Plc says the ringgit will depreciate further due to Brent’s slide, Europe’s biggest bank doesn’t think the losses will be as bad as last year given the sensitivity of the currency to oil prices appears to have fallen.

“Malaysia is a fairly diversified economy, but commodity prices are nevertheless important to its thin current-account surplus, near-term budget and medium-term fiscal consolidation,” said Joey Chew, Asia currency strategist at HSBC in Hong Kong. “Regardless, we cannot turn more constructive until we see signs that the oil-price outlook is stabilising and liquidity conditions for trading the currency improve.”

The 10-year bond yield has dropped 18 basis points in 2016 to as low as 4.02 percent and the five-year yield has fallen to 3.37 percent, the least since October 2013, data compiled by Bloomberg and Bursa Malaysia show. The nation’s debt has returned 0.6 percent this year, compared with 1.5 percent in Indonesia and 1.3 percent in Thailand, according to Bloomberg indexes.

Jens Nystedt, a New York-based manager and head of sovereign research for emerging-market debt at Morgan Stanley Investment, said on Jan 15 that the ringgit remains sensitive to global risk factors and his company had a neutral outlook on the bonds in November. He sees the budget deficit moving to 3.2 percent to 3.4 percent this year.

The ringgit, which had its worst decline since the Asian financial crisis last year, has trailed losses of at least 8 percent in 2016 in commodity currencies including the South African rand and Russian ruble. The Bloomberg Commodity Index is down about 8 percent this year following 2015’s 25 percent plunge. One-month implied volatility in Malaysia’s currency has dropped to 12.14 percent from more than 18 percent three months ago.

“We are taking a wait-and-see approach to all bond markets in the current macro environment,” said PineBridge’s Faergemann. “But Malaysia’s improving economic fundamentals and bond market resilience witnessed so far would make us buyers on dips.”

- Bloomberg