Trade curbs, tighter funding the ‘ top risks’

> Seen as greater threat than interest rate shocks and geopolitical tensions, Moody’s poll reveals

SINGAPORE: Trade restrictions and tighter funding conditions pose more of a risk to the region compared to interest rate shocks and geopolitical tensions, said Moody’s Investors Service.

Trade protectionism and the unexpected tightening of funding conditions were each named by 42% of participants as the main downside risk to the region, according to Moody’s “CrossSector – Malaysia – Heard From the Market: Trade Restrictions, Tighter Funding Conditions Are Top Risks” report.

Participants were polled on various topics at the recent annual Inside Asean – Spotlight on Malaysia conference. Of the respondents, investors comprised 55%, intermediaries 19%, issuers 10% and others 16%.

Moody’s believes both economic powerhouses will avoid a major increase in trade restrictions despite the rising uncertainty and political risks, stemming from the US-China trade tensions – hence deeming geopolitical risks as a downside risk for global and regional outlook.

Household debt was another area of concern indicated by the respondents with 52.4% expressing concern over household debt over corporate sector debt. This is albeit the receding credit risk of the household sector which has decreased due to debt deleveraging, as household debt fell to 84.3% of gross domestic product at the end of 2017, from 88.3% in 2016.

While corporate credit quality risks are well balanced, household leverage represented a meaningful tail risk despite recent structural improvements.

As for interest rate shocks, Moody’s expects global interest rates to rise very gradually, which will be supportive of credit conditions in Malaysia.

“Moody’s view is that the recent correction in the global stock and bond markets has taken place against the backdrop of stronger growth and the inevitable normalisation of interest rates in advanced economies and that it does not alter the US and global outlook for growth.”

About 53% of the respondents are expecting stable credit conditions for domestic banks in 2018.

In line with that, Moody’s maintained a stable outlook on all the rated Malaysian banks, and expects the financial institutions to benefit from stable macroeconomic conditions. Nonetheless, 63% of the respondents expect global and regional credit conditions will be broadly stable in the near term.

On the adoption of electric vehicles (EVS) in Malaysia, 41% thought that EVs would account for only 1%-5% of all new vehicles sold by the mid-2020s, while 23% said they will account for less than 1%.

“Moody’s also expects the impact from the adoption of EVs to be modest in the emerging markets, including in South and Southeast Asia. It expects that oil demand will continue to grow until 2040,” the rating agency said.