Wednesday, 21 February 2018

(The Star) Moody’s sees robust growth for Malaysia, but leverage a concern

PETALING JAYA: Malaysia’s system-wide high debt level – particularly in the household sector – remains a credit challenge in 2018, according to Moody’s Investors Service.

While the country is expected to see a decline in debt burden, it remains higher than most peers.

Moody’s, which has an A3 credit rating and stable outlook on Malaysia, expects the debt burden to reach 48.7% of gross domestic product (GDP) in 2018, down from a projected 49.6% in 2017.

“The government’s debt remains higher than the A-rated median of 40.9% of GDP. We expect debt to edge only marginally lower through to 2019.

“We expect it to remain at around 11.9% over 2018 and 2019. This is in contrast to the improving trend among A3 and A2-rated peers,” said Moody’s in a recent note.

On household debt, the ratings agency said that it continues to present challenges to economic growth. However, Moody’s described the challenges as “manageable”.

Outstanding household debt was 84.3% of GDP at the end of the fourth quarter of 2017, down from 88.4% as of end-2016, but still relatively high given Malaysia’s income levels.

“So far, the performance of mortgages – which comprise close to half of total household loans – has remained broadly stable, supported by stable employment conditions.

“About 20% to 30% of mortgages originating each year exhibit loan-to-value ratios exceeding 90%. The quality of these loans would be at risk in a scenario of falling property prices,” pointed out the rating agency.

Meanwhile, on a more positive note, Moody’s said that Malaysia’s credit profile was supported by its large and diversified economy, ample natural resources and robust medium-term growth prospects.

Driven by a pipeline of large infrastructure projects that will stimulate both public and private investment, the country is forecast to register a GDP growth of 5.2% this year.

“Moreover, a favourable debt structure and large domestic savings help to mitigate risks arising from a relatively high government debt burden.

“The robust growth seen in 2017 is likely to continue into 2018 and over the medium term, supporting the sovereign’s credit profile,” it said.

To recap, the country’s GDP grew by 5.9% in 2017, beating expectations as exports and domestic demand continued to drive the economy.

Moody’s added that Malaysia continues to be exposed to potential volatility in capital inflows, despite current account surpluses.

The high degree of foreign investor participation in both equity and debt exposes Malaysia to portfolio flow volatility, as non-residents held 27.9% of outstanding government instruments as at end-September 2017 and 26.7% of equity on Bursa Malaysia as of January 2018.

“This leaves the sovereign susceptible to swings in foreign reserves.

“We project that Malaysia’s External Vulnerability Indicator, which we use to measure sovereigns’ exposure to a sudden stop in capital flows, will stand at 153.4% in 2018, a high level globally and in particular compared to A-rated sovereigns,” Moody’s said.