KUALA LUMPUR: Malaysia’s contingent liabilities are considered “low-risk” at the current level although they are likely to increase moving forward, according to Moody’s Investors Service.
The ratings agency’s sovereign risk group assistant vice-president Anushka Shah said that the Government has been prudent and careful in managing the country’s contingent liabilities.
Contingent liability refers to off-budget debt and explicit or implicit guarantees by the Government.
“The Malaysian Government provides letters of comfort or guarantees to some of the government-linked companies and the contingent liabilities arising from such guarantees have been increasing at a rapid pace.
“However, we find that the Government has adopted rigorous selection criteria when it grants the guarantees to the respective entities.
“The companies which have received guarantee from the Government are relatively healthy and have strong balance sheet positions.
“Moody’s views the risks resulting from the country’s contingent liabilities to be low at the moment,” she told reporters during Moody’s annual media roundtable Inside Asean: Spotlight on Malaysia here yesterday.
Anushka added that by carving out certain expenditures off its budget, the Government would be able to optimise its expenditure profile and minimise the associated impacts from its spendings.
Malaysia’s contingent liabilities stood at 16.9% of gross domestic product in the first half of 2017.
In an earlier report, RAM Ratings has projected the ratio to rise to 18.4% by 2023, given the Government’s infrastructure developments and commitments to housing and higher-education loan agencies.
Moody’s has an A3 rating on Malaysia, with a stable outlook.
The country is considered as one of the fastest growing A-rated sovereign under Moody’s coverage.
On the Federal Government’s elevated debt burden, Anushka described it as a “credit constraint” for the country going forward.
“The Government’s debt burden is relatively higher than other A-rated sovereign states and this will likely remain a challenge for the country’s credit profile,” she said.
As at end-June 2017, Malaysia’s debt to gross domestic product (GDP) stood at 50.9%, below the Government’s self-imposed threshold of 55%.
In its report last month, Moody’s has estimated the debt burden to reach 48.7% of GDP in 2018, down from a projected 49.6% for the full-year 2017.
Meanwhile, Moody’s vice-president and senior credit officer Eugene Tarzimanov said that Malaysia’s banking system has largely improved in 2017 and the momentum is expected to be sustained this year as well.
“We expect a relatively stable asset quality at the system level in 2018. On profitability, the improvement in banks’ bottom line will likely sustain this year as cost of risk will continue to be moderate.
“The banks’ capitalisation and funding profiles will also remain resilient in 2018,” he said.