Malaysian debt concerns mitigated by strong growth
PETALING JAYA: Moody’s Investors Service, which recently re-affirmed the country’s sovereign credit ratings, has highlighted concerns over the government’s debt that the rating agency feels would be mitigated by the strong economic growth.
According to Moody’s, the country’s resilient economic growth, deep domestic capital market, large international asset position and sizeable export proceeds could help mitigate this vulnerability to sudden shocks.
It also added that Bank Negara’s management of the currency would play a crucial role in determining the adequacy of reserves. “A flexible exchange rate implies less reliance on foreign-exchange reserves as a backstop, owing to lower currency intervention,” it explained.
Overall, Moody’s said the assessment of Malaysia’s credit profile remained stable. “Since our assessment of Malaysia’s overall sovereign credit profile incorporates its vulnerability to capital volatility, trends in the external vulnerability indicator (EVI) and the basic balance, our view on its credit profile does not change during periods of heightened external volatility.
“It would take a significant deterioration of external metrics from current levels for Malaysia’s credit profile to weaken,” it explained.
It said Malaysia’s reserves at current levels are insufficient to meet maturing external long-term debt repayments and short-term debt. However, it pointed out that the country’s resilient economic growth, deep domestic capital market, large international asset position and sizeable export proceeds could help mitigate this vulnerability to sudden shocks.
“At present, reserves are insufficient to meet maturing external long-term debt repayments and short-term debt. However, a sizeable net asset position and deep domestic capital markets moderate external vulnerabilities,” Moody’s said.
In a recently published analysis on the extent of Malaysia’s resilience to high leverage and external vulnerability, it noted that high foreign investor participation in both Malaysia’s equity and debt markets had exposed the country to portfolio flow volatility and swings in foreign reserves.
Malaysia’s international reserves stood at US$101.9bil as at end-No- vember 2017.
Bank Negara said the amount of reserves at hand was sufficient to finance 7.5 months of retained imports and 1.1 times short-term external debt. Although the current level of reserves represents an increase from a recent low of US$93.3bil in September 2015, the peak remains at US$141.4bil in May 2013.
“We project Malaysia’s external vulnerability indicator (EVI), which we use to measure sovereigns’ exposure to a sudden stop in capital flows, to stand at 139.7% in 2018, a high level globally and in particular compared to A-rated sovereigns,” Moody’s said.
It noted that Malaysia’s open capital market and active foreign investor participation heightened the country’s susceptibility to external risks. As at end-September 2017, foreigners held 27.9% of outstanding government instruments and 25.2% of equities in the local stock market.
“This is a relatively high proportion compared with other emerging markets, but not dissimilar to some other A-rated sovereigns like Poland (A2, stable) and Mexico (A3, negative),” Moody’s said.
As at end-September 2017, shortterm debt comprised over 44% of total external debt, up from 39% in the second quarter of 2016 but well below its peak of almost 50% in 2011. This was driven by the increase in the short-term debt within the banking system.
“While specific features account for this increase in banking system debt, we do not expect that banks’ and hence Malaysia’s reliance on short-term debt will markedly reduce in the near term,” Moody’s said, adding that several factors mitigated the risks.
“First, resident banks and corporates hold three-quarters of Malaysia’s external assets (US$297.6bil as at end-September 2017). These can be drawn upon to meet their external debt obligations, without creating a claim on official reserves,” Moody’s explained.
“Second, a large domestic institutional investor base, including government-linked investment corporations such as the Employees Provident Fund and KWAP, dominate the resident portfolio, providing a large funding pool for the economy’s local-currency debt and anchors interest rates,” it added.