Poll shows protectionism the main downside risk for Malaysia

Poll finds unexpected tightening in funding conditions a big risk too

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.