Concerns about Malaysia's household debt: Moody's poll

Financial institutions

KUALA LUMPUR: The level of household debt in Malaysia remains a concern despite recent structural improvements, according to a recent poll conducted by Moody's Investors Service.

It said on Tuesday that 52.4% of the participants at its March 21 “Inside Asean - Spotlight on Malaysia” conference held here were concerned about the level of household debt in Malaysia.

“Moody's considers that credit risk in the household sector is receding, driven by deleveraging, as household debt decreased to 84.3% of GDP at the end of 2017, from 88.3% in 2016,” it said.

The majority -- 53% -- also expect stable credit conditions for domestic banks in 2018. Moody's maintains stable outlooks on all the rated Malaysian banks, and expect that they will benefit from stable macroeconomic conditions. 

“Corporate credit quality risks are well balanced, but household leverage represents a meaningful tail risk despite recent structural improvements,” it said

Moody's conclusions are contained in its just-released report, "Cross-sector -- Malaysia: Heard from the market: Trade restrictions, tighter funding conditions are top risks".

At the conference, participants were polled on their views on various topics. Of the respondents, investors comprised 55%, intermediaries 19%, issuers 10% and others 16%.

It said that the survey showed that credit conditions for domestic banks are expected to remain stable. The majority of poll participants expect stable credit conditions for domestic banks in 2018. 

“We maintain stable outlooks on all the rated Malaysian banks, and expect that they will benefit from stable macroeconomic conditions. Corporate credit quality risks are well balanced, but household leverage represents a meaningful tail risk despite recent structural improvement,” it said.

The survey also showed that stable global and regional credit conditions support Malaysia’s credit outlook.

“Participants agreed with our base case view that global and regional credit conditions will be broadly stable in the near term. A benign external environment and Malaysia's large and diversified economy, ample natural resources and robust medium-term growth prospects will support the country's sovereign credit profile,” it said.

The poll participants considered trade protectionism and unexpected tightening in funding conditions to be the top downside risks. 

This was a shift from Moody's polls that were conducted at our Hong Kong and Singapore conferences, when respondents viewed an interest rate shock and geopolitical tensions as the key risks for the region. 

“As a highly trade dependent economy, Malaysia is vulnerable to targeted protectionist measures by the US,” it said.

Moody's said a gradual rise in global interest rates will be manageable for Malaysia. 

The poll participants indicated that rising rates will have a limited and manageable impact on Malaysia, a sentiment it broadly agrees with. 

“We expect global interest rates to rise very gradually this year which will be supportive of credit conditions in Malaysia,” it said.

On the external front, Moody's said its base case view that global and regional credit conditions would be broadly stable in the near term was shared by 63% of the participants.

It expects global growth to peak in 2018 and then to moderate as global monetary conditions very gradually tighten. The stable global and regional macroeconomic backdrop will support growth dynamics in Malaysia.

Both trade protectionism and the unexpected tightening of funding conditions were each named by 42% of participants as the main downside risk to the region. 

This is a shift from polls conducted at Moody's Hong Kong and Singapore conferences at the start of this year, when respondents viewed an interest rate shock and geopolitical tensions as the key risks for the region.

Despite rising uncertainty and political risks surrounding the US-China trading relationship, Moody's continues to believe that the US and China will avoid a major increase in trade restrictions, given the detrimental impact such an increase would have on both economies.

Moody's views geopolitical risks as a downside risk to the global and regional outlook.

Moreover, Moody's view is that the recent correction in the global stock and bond markets has taken place against the backdrop of stronger growth and the inevitable normalisation of interest rates in advanced economies and that it does not alter the US and global outlook for growth.