Moody’s: Malaysia’s banking sector remains strong


MALAYSIA’S financial institutions are expected to benefit from the country’s diversified and competitive economy with ample economic resources, according to Moody’s Investors Service.

The research agency said Malaysia’s portfolio of strong executive and legislative institutions and consistent and effective macroeconomic policymaking have been supporting the country’s financial stability.

“We expect Malaysia’s real GDP to rebound to between 5% and 5.5% in 2021 after a 5.6% contraction in 2020 because of disruptions arising from the coronavirus pandemic.

“Notwithstanding credible and effective institutions, the government’s capacity to respond to shocks is constrained by its narrow revenue base and high debt burden,” it said in a report yesterday.

Malaysia’s credit conditions reflect the country’s asset risks to banks due to the elevated leverage among households and businesses, Moody’s added.

It noted that household debt as a percentage of GDP rose to 93.3% as at the end of 2020 from 82.9% a year ago. However, the increase was driven by the GDP contraction rather than credit expansion.

Similarly, the non-financial corporate debt-to-GDP ratio rose to 110% as at the end of 2020 from 99.4% a year ago.

“The high leverage will exacerbate challenges faced by borrowers during periods of economic downturns,” Moody’s stated.

It expects Malaysia’s economic growth prospects to remain strong, backed by the well-developed infrastructure and competitive services and manufacturing sectors.

“The resiliency of its growth is also supported by a highly diversified economy. Malaysia’s real GDP growth is expected to be driven by the base effects and the government’s stimulus packages,” it noted, adding the movement and activity restrictions, albeit less stringent compared to the second quarter of last year, will weigh on the recovery.

It further said the pace of economic recovery would also depend on the rate of immunisation rollouts and vaccine efficacy both domestically and globally.

Moody’s assessment of Malaysia’s institutional strength reflected the country’s improving rule of law, strong executive and legislative institutions and track record of effective macroeconomic policymaking.

It said these strengths are balanced against perceived weaknesses in the country’s control of corruption, check-and-balance and voice and accountability based on international governance indicators and as uncovered from the 1Malaysia Development Bhd case.

The financial credit research firm said the country’s inflation has remained low and stable over the past decade despite bouts of commodity price and financial market volatility, while the credit growth has averaged around 8% year-on-year, close to the country’s nominal GDP growth.

“In response to the pandemic, the central bank eased monetary policy and implemented numerous liquidity measures to support households and businesses.

“In addition to financing schemes for small businesses, it also allowed banks to defer and restructure loan repayments of affected borrowers,” Moody’s noted.

Moody’s said the government also announced economic packages totalling RM305 billion, which is 23% of Malaysia’s GDP in 2020, and indicated its commitment to support the economy through its RM322.5 billion budget for 2021.

However, Moody’s said its assessment of Malaysia’s susceptibility to event risk reflects the uncertainty in domestic political developments that may distract the government from its policy priorities and hinder its ability to implement policies that effectively address weaknesses in its credit profile, with implications for the longer-term macro environment.

“The current coalition government, led by the Perikatan Nasional, remains fragile amid ongoing speculation about support from Umno, its key ally and largest political party in Malaysia,” it said.