KUALA LUMPUR: Moody’s Investors Service expects Malaysia's growth prospects to remain strong and it forecasts GDP to rebound by between 5% and 5.5% this year.
In its sector report on the banking sector on Tuesday, it said the prospects are underpinned by well-developed infrastructure, competitive services and manufacturing sectors, as well as ample natural resources.
“The resiliency of its growth is also supported by a highly diversified economy, ” it said as it rated the economic strength at “a1”.
The rating agency expects the rebound in the economy to be driven by base effects and the government's stimulus packages.
However, it noted movement and activity restrictions because of still high daily Covid-19 infections – albeit less stringent compared to the second quarter of last year – will weigh on the recovery.
“The pace of economic recovery will also depend on the rate of immunisation roll-outs and vaccine efficacy both domestically and globally.
“Notwithstanding credible and effective institutions, the government's capacity to respond to shocks is constrained by its narrow revenue base and high debt burden. Volatile politics also have the potential to distract the government from its policy priorities, particularly longer-term reforms that may strengthen the credit profile over time.
“Our assessment of Malaysia's macro profile also incorporates asset risks to banks because of the elevated leverage among households and corporates, that in turn will exacerbate challenges faced by borrowers during periods of economic downturns, ” it said.
Last year, Malaysia's real GDP contracted by 5.6% as a result of the pandemic. The coronavirus-induced domestic movement controls resulted in a sharp decline in domestic consumption and investment, while lock-downs and social restrictions at its key trading partners hurt its net exports.
Moody’s rated Malaysia's institutional strength at “a2” which reflects the country's improving rule of law, strong executive and legislative institutions and track record of effective macroeconomic policymaking.
However, these strengths are balanced against perceived weaknesses in the country's control of corruption, checks and balances, and voice and accountability based on international governance indicators and as uncovered from the 1 Malaysia Development Bhd (1MDB) case.
“Malaysia has a track record of effective macroeconomic policymaking. The country's inflation has remained low and stable over the past decade despite bouts of commodity price and financial market volatility, while credit growth has averaged around 8% year-on-year – close to the country's nominal GDP growth – with limited fluctuations over the same period, thereby contributing to financial stability, ” it said.
It pointed out Bank Negara Malaysia eased monetary policy and implemented numerous liquidity measures to support households and businesses in response to the pandemic.
Last year, the central bank’s monetary policy committee had cut the overnight policy rate by 75 basis points last year to a low of 1.75%.
Moody’s also noted the financing schemes for small businesses and Bank Negara allowed banks to defer and restructure loan repayments of affected borrowers.
The government also announced economic packages totaling RM305bil (23% of GDP) in 2020, and indicated its commitment to support the economy through its RM322.5bil budget for 2021.
However, it rated the country’s susceptibility to event risk at “baa”.
“Our assessment of Malaysia's susceptibility to event risk reflects the uncertainty and noise 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, ” it noted.
The rating agency said the Malaysian government continues to enjoy strong access to funding, supported by the country's large pool of domestic savings and a deep capital market in which foreign investors actively participate.
Malaysia's current account surplus, underpinned by the diversification of its export products and markets, also provides stability to capital flows and balance of payments.
Moody’s rated Malaysia’s credit conditions “-2 adjustment” to reflect asset risks to banks because of the elevated leverage among households and businesses.
“Household debt as a percentage of GDP rose to 93.3% as of the end of 2020 from 82.9% a year ago, although the increase was driven by GDP contraction rather than credit expansion.
“Similarly, the non-financial corporate debt-to-GDP ratio rose to 110.0% as of the end of 2020 from 99.4% a year ago.
“The high leverage will exacerbate challenges faced by borrowers during periods of economic downturns, ” it said.
In 2020, the pandemic disrupted the domestic economy, with borrowers from tourism-related businesses, small and medium enterprises and low-income households among the hardest hit.
In response, banks extended repayment assistance to affected borrowers that will help them cope with the abrupt disruption to their incomes or revenues.
As of Dec 31,2020, loans that are under repayment assistance accounted for 8.9% and 17% of total household and business loans respectively.
“While most of these loans are not classified as impaired because of regulatory forbearance, we expect some to default eventually, with the extent depending on the pace of economic recovery, ” it said.
As for funding conditions, it said there was no adjustment. Banks in Malaysia are mainly funded by deposits and have access to a well-developed domestic capital market.
The banks’ liquidity is also robust, with the systemwide liquidity coverage ratio of 147% as of February 2021 remaining well above the regulatory minimum of 100%.
Moody’s said the banking industry structure is a neutral factor for Malaysia's macro profile. The Malaysian banking system is fairly concentrated.
The largest five banks constituted more than 65% of banking system loans as at Dec 31,2020.