S&P sees Malaysia escaping middle income trap to be a challenge

Fitch Ratings expects Malaysian banks to offer higher rates on longer-term deposits to further move away from short-term funding.

KUALA LUMPUR: S&P Global Ratings expects that Malaysia's objective to escape the middle income trap will continue to be a challenge while credit risk is high because of the country's high private-sector credit level relative to income.

In its banking industry country risk assessment issued on Monday, it classified the banking sector of Malaysia in group “4” under its Banking Industry Country Risk Assessment (BICRA). 

Other countries in group “4” are Estonia, Israel, Kuwait, Mexico, New Zealand, Saudi Arabia, and Taiwan.

“The anchor for banks operating only in Malaysia is “bbb”. Our bank criteria use our BICRA economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating,” it said.

The international ratings agency said Malaysia's modest income levels and vulnerability to global economic conditions constrain the country's economic resilience. 

“We believe that escaping the middle income trap would continue to be a challenge. Several factors temper these weaknesses: an open, diversified, and competitive economy with a moderately flexible labour market; reasonably developed infrastructure; and a high savings rate,” it said.

S&P Global Ratings said credit risk is high because of Malaysia's high private-sector credit level relative to income. 

This is partially mitigated by the financial buffers and healthy debt-servicing ratios of the country's corporate sector.

Credit analyst Ivan Tan said: "We believe Malaysian banks' asset quality may experience modest deterioration due to slower, but still healthy, economic growth. 

"Nevertheless, we expect new loan loss provisions to remain low, given that nonperforming loans are well-provisioned and increasing from a low base."

The ratings agency said in its view, the risk of imbalances in Malaysia's economy is low, given slower credit growth and moderating property prices in recent years. 

“Government and regulatory measures to tighten lending and deter speculation have moderated price increases, and we believe that the government is committed to stabilising property prices,” it said.

S&P Global Ratings considers Malaysia's banking regulations to be broadly in line with international standards. 

“We view corporate governance and transparency standards to be adequate and supportive of financial stability. 

"The matured Malaysian banking system is competitive, but returns have been generally stable, reflecting the system's focus on recurring lending and fee-related income from its core business, with little dependence on volatile trading gains," Tan said.