Malaysia not spared

• Feb 20, 2020

PETALING JAYA: The latest warning by one of the Big Three rating agencies on Asia’s weakening credit conditions has also brought Malaysia under the microscope, particularly the country’s corporate debt default risk.

In a report, Moody’s Investors Service has warned that credit conditions in Asia would turn negative in 2020 as the region’s economic slowdown could turn out to be more than just a temporary blip.

The ratings agency also named Malaysia as one of the Asian countries most exposed to deterioration in corporate debt repayment capacity.

This was based on its stress tests on corporate income shock impact for the region. For context, India and Indonesia were most exposed to deterioration in corporate debt repayment capacity, followed by Singapore, Malaysia and China.

“In the banking sector, deterioration in growth dynamics and macroeconomic conditions will inevitably weigh on banks’ asset quality through a combination of deteriorating debt repayment capabilities and rising default risks among weaker Asian companies.

“Despite these growing challenges, strong capital buffers will likely help banks in the region weather asset quality challenges in a stress scenario, ” it said.

According to Moody’s, the downshift in Asia’s growth trajectory appeared to be caused by structural issues, rather than cyclical.

China, which is a major source of export demand for Asia, is now on a path toward structurally slower growth and the multilateral global trading regime is also under increasing threat.

In addition, the apparent dilution of US security guarantees in the region has led to increasing geopolitical risks, while longer-term challenges relating to demographics are on the rise.

“The outbreak of the coronavirus disease (Covid-19) has added a further dent to growth prospects at a time when economic growth trajectories throughout the region were already declining, ” said Deborah Tan, Moody’s assistant vice-president and analyst.

Moody’s pointed out that the likelihood of risks crystallising has risen in the region.

The structural economic challenges faced by countries in Asia, alongside heightened political risks and policy uncertainty, will constrain policy choices and limit the region’s ability to respond to negative events.

“Investors might recalibrate their demand for assets from the region, and funding costs could rise in weaker economies. Additionally, Asia’s deepening integration with global financial systems has increased its susceptibility to capital flow reversals.

“This makes the region more susceptible to changes in investor sentiment, triggered by unexpected shocks such as the Covid-19 outbreak, although market access for our rated portfolio has not been negatively affected by the outbreak.

“Weaker growth prospects could in turn increase debt service challenges for the region, ” it said.

On the ongoing US-China trade tensions despite the so-called “phase one” trade deal between both countries, Moody’s expected some relocations of factory production out of China to take place to serve the US market.

Malaysia, alongside Taiwan, Thailand and Vietnam, may benefit partially from some offshoring of Chinese industrial capacity, given these countries’ higher export similarity to China.

“However, it should be noted that the possibility remains of tariffs being introduced on these countries’ exports to the US at some future point.

“Moreover, these estimates do not take into account the broader impact of the erosion of the rules-based trading system which would be negative for the region’s export-oriented economies, irrespective of any gains to be had from trade diversion, ” said Moody’s.

While Malaysia could likely benefit from the trade diversion out of China, the former could also take a hit as a result of the expected drop in Chinese exports to the United States.

Moody’s said China continued to rely on imports of intermediates and final inputs for some of its production processes, most of which were sourced from Asia.

“Taiwan and Malaysia, in our view, are the most vulnerable, mainly as a result of their supply of inputs for Chinese exports to the United States in electronic and optical equipment as well as electrical machinery, ” it added.

“Despite these growing challenges, strong capital buffers will likely help banks in the region weather asset quality challenges in a stress scenario, ” it said.

According to Moody’s, the downshift in Asia’s growth trajectory appeared to be caused by structural issues, rather than cyclical. China, which is a major source of export demand for Asia, is on a path toward structurally slower growth and the multilateral global trading regime is also under increasing threat.

In addition, the apparent dilution of US security guarantees in the region has led to increasing geopolitical risks, while longer-term challenges relating to demographics are on the rise.

“The outbreak of the coronavirus disease (Covid-19) has added a further dent to growth prospects at a time when economic growth trajectories throughout the region were already declining, ” said Deborah Tan, Moody’s assistant vice-president and analyst.

Moody’s pointed out that the likelihood of risks crystallising has risen in the region.

The structural economic challenges faced by countries in Asia, alongside heightened political risks and policy uncertainty, will constrain policy choices and limit the region’s ability to respond to negative events.

“Investors might recalibrate their demand for assets from the region, and funding costs could rise in weaker economies. Additionally, Asia’s deepening integration with global financial systems has increased its susceptibility to capital flow reversals. This makes the region more susceptible to changes in investor sentiment, triggered by unexpected shocks such as the Covid-19 outbreak, although market access for our rated portfolio has not been negatively affected by the outbreak. Weaker growth prospects could in turn increase debt service challenges for the region, ” it said.

On the ongoing US-China trade tensions despite the so-called “phase one” trade deal between both countries, Moody’s expected some relocations of factory production out of China to take place to serve the US market.

Malaysia, alongside Taiwan, Thailand and Vietnam, may benefit partially from some offshoring of Chinese industrial capacity, given these countries’ higher export similarity to China.

“However, it should be noted that the possibility remains of tariffs being introduced on these countries’ exports to the US at some future point. Moreover, these estimates do not take into account the broader impact of the erosion of the rules-based trading system which would be negative for the region’s export-oriented economies, irrespective of any gains to be had from trade diversion, ” said Moody’s.

While Malaysia could likely benefit from the trade diversion out of China, the former could also take a hit as a result of the expected drop in Chinese exports to the United States.Moody’s said China continued to rely on imports of intermediates and final inputs for some of its production processes, most of which were sourced from Asia. “Taiwan and Malaysia, in our view, are the most vulnerable, mainly as a result of their supply of inputs for Chinese exports to the United States in electronic and optical equipment as well as electrical machinery, ” it added.

Source: https://www.thestar.com.my/business/business-news/2020/02/20/malaysia-not-spared