When it comes to what kind of central-bank policy is best for luring foreign investors to Asia during the Covid-19 pandemic, orthodoxy is winning hands down. Take the respective fates of Indonesia and Malaysia.
The proportion of Indonesia’s debt held by foreigners has dropped to 27% from 39% at the end of last year, while in Malaysia it increased to 24% from a low of 21.7% in April. The difference has narrowed to just 3 percentage points from as much as 14 percentage points at end-2019. It’s the same story for fund flows. Indonesia has had net foreign outflows of US$6.8 billion this year, while Malaysia has recorded inflows of US$1.3 billion.
One of the factors deterring flows into Indonesia has been the central bank’s debt-monetization program, in which it buys bonds directly from the government. Money managers are concerned the plan will become entrenched, despite repeated assurances to the contrary from the central bank governor and finance minister. Malaysia’s central bank has stuck closely to orthodox measures in its efforts to combat the coronavirus: cutting rates and lowering the statutory requirement ratio.
Another factor luring global funds to Malaysia instead of Indonesia has been Bank Negara’s more aggressive rate action. Malaysian policy makers have trimmed their benchmark by a combined 125 basis points this year, whereas Indonesia’s has only cut by 100 basis points, even though its higher nominal rate means it has relatively more headroom.
One important consequence of the changing fund-flow pattern has been to sap volatility in Indonesia’s bond market.
A rolling 30-day measure of the standard deviation of Indonesian yields peaked at more than 0.6 in March, while in Malaysia the same gauge stood at 0.3. That gauge of volatility in Indonesia has since tumbled to as low as 0.03, dropping below that for Malaysia.
While much of the slide in volatility is due to the withdrawal of foreign funds, another factor is the increasing presence of Bank Indonesia.
Central bank ownership of the nation’s sovereign bonds has increased to about 20% as of Oct 12 from less than 10% at the start of the year, according to Jennifer Kusuma, a senior rates strategist at Australia & New Zealand Banking Group Ltd in Singapore. In contrast, Bank Negara Malaysia owned 2.6% of the market at the end of September, versus 0.5% at the beginning of 2020, she said.
While foreigners have cut holdings of Indonesia’s debt, the tumble in volatility looks to offer some incentive for potential investors. If volatility remains at current levels, then buyers have the opportunity to get some of the highest real yields in the region at potentially lower risk.