Malaysia resilient to external headwinds

SINGAPORE: Moody’s Investors Service said the government of Malaysia (A3 stable) demonstrates a relatively high debt burden.

In a report released today it said Malaysia will be able to maintain its strong growth trends on its highly diversified and competitive economic structure, that have proven to be resilient to external headwinds.

The economy’s long-term potential growth should stay robust at around 5%, which would be significantly stronger than most other A-rated sovereigns.

On the issue of whether household debt presents challenges to Malaysia’s macro-financial stability and growth, Moody’s said at 84.6% of GDP at the end of September 2017, Malaysia’s household debt levels, while stable, pose downside risks to growth.

“Nevertheless, such debt does not pose material threats to financial stability. Households have large liquid financial assets to buffer the impact of a potential shock to debt servicing capacity. Moreover, ongoing macroprudential measures will help contain potential further increases in debt,” it said.

It said Malaysia is also exposed to a potential sharp and lasting negative change in external financing conditions, given the country’s reliance on foreign financing.

“Nevertheless, its resilient economic growth, deep domestic capital markets, large international asset position and large export proceeds mitigate the sovereign’s vulnerability to sudden shocks,” said Moody’s.

Moody’s analysis is contained in its report titled “Government of Malaysia: FAQ on credit resilience to high leverage and external vulnerability risks”.

Moody’s report answers the five questions, including: Do you expect fiscal trends to improve? Do government guarantees present material contingent liability risks? Is Malaysia vulnerable to external conditions? Are strong growth trends likely to be sustained? Does household debt present challenges to macro-financial stability and growth?

On fiscal trends, Moody’s does not expect Malaysia’s fiscal trends to improve significantly. The agency explains that fiscal consolidation has slowed since 2014 and absent any meaningful revenue-raising measures, further material progress is unlikely.

The deficit will narrow from 2.8% of gross domestic product (GDP) in 2018, as and when strong nominal GDP growth boosts revenues. As a result, the debt burden will likely stabilise around the current levels (50.9% of GDP in June 2017), significantly higher than the A-rated peer median of 40.5% at year-end 2016. Debt affordability will remain constrained by a narrow revenue base.

With government guarantees, Moody’s said that such guarantees are unlikely to present material contingent liability risk, because they are issued through a stringent selection process and most companies that benefit from them are profitable and competently managed. At the end of 2016, the total debt of non-financial public sector corporations stood at 16.6% of GDP, two-thirds of which was guaranteed by the government.

Moody’s pointed out that Malaysia’s reserves are insufficient to meet maturing external long-term debt repayments and short-term debt. Nonetheless, a sizeable net asset position, large export proceeds, and deep domestic capital markets moderate external vulnerability.