Trade restrictions, tighter funding conditions pose risks to Malaysia


Malaysia is vulnerable to trade protectionism and unexpected tightening in funding conditions due to its high dependence on trade, according to a report by Moody’s Investors Service Inc.

The cross-sector study projects that interest-rate shock and geopolitical tensions are the key risks for the region, the firm said.

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

Still, the report stated that political risks are unlikely to affect Malaysia’s fiscal deficit reduction goals.

Moody’s further added that higher import duties to the US would inflict secondary effects on Malaysia due to its integrated supply chains through China, as well as through a shift in demand-supply and price dynamics, including commodities.

“A significant share of Malaysia’s exports consists of electronic components such as telecommunications equipment and electrical apparatus and parts, which are inputs for final products.

“Both product categories account for 21% of Malaysia’s total exports,” it said.

Meanwhile, the country is expected to be able to manage a gradual rise in global interest rates.

“We do not see US federal funds 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 US Federal Reserve rate increases in 2018 and a further three increases in 2019,” it said.

Moody’s report also expected several mitigating factors to help shield the country from external shocks.

“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,” it said.

Only 3.3% of the government’s total debt burden was funded by foreign-currency financing at the end of 2016.

Similarly, resident banks and corporates hold three-quarters of the country’s external assets, which can be drawn upon to meet its external debt obligations.

As for its banking sector stability, economic growth prospects are seen to be stable.

“We maintain ‘Stable’ outlook on all the rated Malaysian banks and expect that Malaysian banks will benefit from solid and stable macro- economic conditions,” it said.

According to the report, 52.4% of poll participants are concerned about household debt level and less about corporate leverage.

“We consider that credit risk in the household sector is receding, driven by deleveraging as household debt decreased to 84.3% of gross domestic product at the end of 2017, from 88.3% in 2016.

“Also, the structure of household debt improved, as the riskiest segment — low-income borrowers — makes up 17.4% of total banking system financing to households, lower than 19.1% in 2016,” it said.

As for the oil and gas sector, electric vehicles (EVs) are not projected to affect the segment in near to medium-term.

“Forty-one percent of the study audience thought that EV would only account for 1% to 5% of all new vehicles by mid-2020s, followed by 23% saying that it will account for less than 1% of all new vehicles sold,” Moody’s said.

Oil demand is expected to grow until 2040, while the impact of the EV adoption is seen to be modest in emerging Asia markets.