The government said it will strengthen regulations of its bond market, a move analysts said will boost investor confidence following recent defaults that hurt sentiment.

Second Finance Minister Nor Mohamed Yakcop said Malaysia would introduce tighter rules for credit agencies and set up bond pricing agencies to enhance professional standards in the market.

"The SC (Securities Commission) should come out with rules this week," Nor Mohamed told reporters.

Analysts immediately welcomed the announcement.

"The proposed measures are timely and a step in the right direction to bring back confidence in the local debt market," an analyst with a local brokerage told AFP.

"It is a wise move to prevent future cases of defaults. If rating agencies do not practice high standards it is difficult to develop the local bond market," he added.

Outcry over defaults

Last August, battery manufacturer ABI Malaysia defaulted on a RM80 million Islamic bond while heavy vehicle manufacturer Pesaka Astana didn't make payments on its RM140 million Islamic bond.

It sparked an outcry from its investors as both bonds were given strong local ratings before the defaults.

Nor Mohamed said it was imperative that credit rating agencies be maintained through a formula of high standards of due diligence and transparency and accuracy of credit assessment.

Malaysia has two rating agencies - Rating Agency Malaysia and Malaysian Rating Corp Bhd.

Malaysia's bond market has outstanding issues worth more than RM300 billion, divided between government and corporate debt.