Poll shows pro­tec­tion­ism the main down­side risk for Malaysia

Poll finds un­ex­pected tight­en­ing in fund­ing con­di­tions a big risk too

The Star Malaysia - StarBiz - - Front Page -

PETALING JAYA: In­creased trade pro­tec­tion­ism and un­ex­pected tight­en­ing of fund­ing con­di­tions are the main down­side risks for Malaysia, ac­cord­ing to 42% of par­tic­i­pants in a sur­vey car­ried out at the fourth an­nual In­side Asean – Spot­light on Malaysia con­fer­ence or­gan­ised by Moody’s In­vestors Ser­vice.

“Poll par­tic­i­pants con­sid­ered trade pro­tec­tion­ism and un­ex­pected tight­en­ing in fund­ing con­di­tions to be the top down­side risks.

“This is a shift from Moody’s polls that were con­ducted at our Hong Kong and Sin­ga­pore con­fer­ences, when re­spon­dents viewed an in­ter­est rate shock and geopo­lit­i­cal ten­sions as the key risks for the re­gion.

“As a highly trade-de­pen­dent econ­omy, Malaysia is vul­ner­a­ble to tar­geted pro­tec­tion­ist mea­sures by the United States,” the rat­ing agency said in a re­port.

“Trade re­stric­tions that are more ag­gres­sive than have been re­cently pro­posed by the US and China would im­pact Malaysia di­rectly and in­di­rectly,” it added.

“While the di­rect im­pact of re­cent US tar­iff in­creases on Malaysia is lim­ited, the coun­try’s di­rect ex­ports to the US are 9.5% of to­tal ex­ports, which sug­gests size­able ex­po­sure.

“In ad­di­tion to the di­rect ex­port im­pact, higher im­port du­ties to the US would in­flict sec­ondary ef­fects on Malaysia,” it said.

An im­por­tant fac­tor would be the coun­try’s in­te­grated sup­ply chains, es­pe­cially through China. A shift in de­mand/sup­ply and the price dy­nam­ics of key in­puts, in­clud­ing com­modi­ties, would be an­other fac­tor that will im­pact Malaysia.

Moody’s noted that a sig­nif­i­cant share of the coun­try’s ex­ports con­sisted of elec­tronic com­po­nents such as telecom­mu­ni­ca­tions equip­ment and elec­tri­cal ap­pa­ra­tus and parts, in­puts for fi­nal prod­ucts that ac­counted for 21% of to­tal ex­ports.

Mean­while, more than 60% of re­spon­dents said ris­ing global in­ter­est rates would be man­age­able, in line with Moody’s views.

“We do not see the Fed­eral Re­serve (Fed) rate nor­mal­i­sa­tion, which is ex­pected to be very grad­ual and well-com­mu­ni­cated, as a risk for Malaysia.

“Our base­line ex­pec­ta­tion is for three to four Fed rate in­creases in 2018 and a fur­ther three in­creases in 2019,” it said.

Moody’s said the main trans­mis­sion chan­nel for an in­ter­est rate shock to have an im­pact on Malaysia would be through port­fo­lio flows be­cause of a high level of for­eign in­vestor par­tic­i­pa­tion — non-res­i­dents held 27.9% of out­stand­ing gov­ern­ment in­stru­ments at the end of Septem­ber 2017, and 28% of eq­uity in Bursa Malaysia as of Fe­bru­ary 2018.

“Sev­eral fac­tors mit­i­gate the ex­ter­nal risks to Malaysia’s credit pro­file. For one, the sovereign has very deep do­mes­tic cap­i­tal mar­kets, and as such, it is ex­posed to but not re­liant on for­eign-cur­rency fi­nanc­ing to fund its debt bur­den.

“As of end-2016, just 3.3% of the gov­ern­ment’s to­tal debt bur­den was funded by for­eign-cur­rency fi­nanc­ing,” it said.

The ma­jor­ity of poll par­tic­i­pants ex­pect sta­ble credit con­di­tions for do­mes­tic banks in 2018.

“We main­tain ‘sta­ble’ out­looks on all the rated Malaysian banks, and ex­pect that they will ben­e­fit from sta­ble macroe­co­nomic con­di­tions.

“Cor­po­rate credit qual­ity risks are well-bal­anced, but house­hold lever­age rep­re­sents a mean­ing­ful tail risk de­spite re­cent struc­tural im­prove­ment,” it said.

Moody’s also ex­pects the Malaysian gov­ern­ment to con­tinue demon­strat­ing a com­mit­ment to fis­cal deficit re­duc­tion goals, de­spite in­creased po­lit­i­cal risks in re­cent years and even through the elec­tion cy­cles.

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