Governance concerns seen as biggest challenge

PETALING JAYA: Governance concerns represent the largest structural challenge to medium-term growth in Malaysia, according to market participants who attended the Moody’s “Investors Service Inside Asean – Spotlight on Malaysia” briefing last month.
In a report released yesterday, the rating agency said 47% of 110 respondents cited governance concerns as the largest structural economic challenge facing Malaysia, followed by high private sector indebtedness (27%).
While debt distress at 1Malaysia Development Bhd (1MDB) has not been viewed as a systemic risk, Moody’s said it has contributed to rising political risk and exposed weaknesses in Malaysia’s institutional framework.
On the economy front, Moody’s expects Malaysia’s gross domestic product (GDP) to grow slower at 4.4% in 2016 compared with 5% in 2015, in line with more than half (58%) of market participants foresee that the GDP will decelerate to 4% to 4.5%.
“Subdued global demand, soft commodity prices, elevated household leverage and weak consumer and business confidence are all likely to weigh on the country’s growth this year,” it said.
Moody’s also said a more stable ringgit is expected in the next 12 months, with 53% of market participants foresee the currency to consolidate between RM4.00 and RM4.20 against the US dollar within that period of time.
“In our view, even if the ringgit were to remain weak, the overall exposure of Malaysia’s sovereign and banks to foreign exchange risks would remain manageable given the relatively low share of foreign-currency debt relative to total debt,” it opined.
Even though high household debt – equivalent to 89.1% of GDP in 2015 and weakening corporate credit metrics pose asset quality risks to banks, Moody’s said the buffers against these risks remain robust.
Moody’s said Malaysian banks exposure to the oil and gas industry is manageable as it only made up of 2% to 3% of gross loans or 15%-23% of common equity tier 1 capital as at end-2015.
“Most exposure are concentrated in the offshore marine segment, which we consider to be the most vulnerable in the current low oil price environment. However, the relatively low share of energy related loans should prevent a major spike in overall non-performing loans,” it noted.