Uncertainties on Malaysia’s fiscal position, including questions on the country’s ability to repay 1MDB’s loans, are affecting the confidence of foreign bondholders, an analyst told Bloomberg.

“Uncertainty over how the fiscal deficit will pan out will overhang,” said fund manager Wilfred Wee of Singapore’s Investec Asset Management Ltd.

“Until the dust settles, we have reduced our still overweight exposure to Malaysia, recognising that Malaysia’s current account and overall fundamentals remain by and large still attractive versus peers.”

The report noted that foreign ownership of Malaysia’s bonds was currently at the lowest since last August and that global funds sold almost RM10 billion in Malaysian bonds in May, the most since March 2017.

Since coming to power, the Pakatan Harapan administration has revealed that their predecessor had “bailed out” 1MDB to the tune of RM7 billion over the past one year alone including by selling state land and redeeming monies from sovereign wealth fund Khazanah Berhad.

Investors are also concerned about the disclosure that Malaysia had previously under-reported its debt obligations and that the removal of GST would further add fiscal pressures.

'Concerns over Malaysia overdone'

“We hold a cautious view on Malaysia due to fiscal and political uncertainty, potential negative rating action and uninspiring valuations,” fund manager Roland Mieth of Singapore’s Pacific Investment Management Co said.

"The replacement of GST with the service and sales taxes adds uncertainty to Malaysia’s fiscal trajectory.”

However, a fund manager at UK’s GAM Ltd believes that concerns over Malaysia were “overdone”, pointing to how the government is likely to meet its 2018 budget deficit target of 2.8 percent of GDP and that the economy was growing at a pace that will gradually reduce the debt-to-GDP ratio.

“We have a modest overweight on Malaysian government bonds,” he said.

“Inflation has remained contained, Malaysia’s balance of payments appear solid, foreign reserves are rising and both real and nominal yields are at attractive levels.”

Analyst Aninda Mitra with BNY Mellon Investment Management said Malaysia may need to borrow more following the removal of GST.

“We would prefer to not be heavily exposed to Malaysian bonds until the fiscal uncertainty abates,” Mitra said.

“On many metrics, the ringgit remains a relatively cheap currency to own. But we are likely to see a prolonged tussle between policy uncertainty and a broader loss of confidence, which could overwhelm any lingering perception of value.”