Malaysia's reserves insufficient to meet maturing external long-term debt repayments, says Moody's

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KUALA LUMPUR (Dec 13): Malaysia's reserves are not sufficient to meet maturing external long-term debt repayments and short-term debt, according to Moody's Investors Services' recent report Government of Malaysia: FAQ on credit resilience to high leverage and external vulnerability risks.

In the report, Moody's, however, noted that a sizeable net asset position, large export proceeds and deep domestic capital markets moderate external vulnerability.

The credit rating agency also added that the government of Malaysia, which has an A3 and stable rating, "demonstrates a relatively high but stable government and household debt burden".

According to Moody's, Malaysia is also exposed to a potential sharp and lasting negative change in external financing conditions, given the country's reliance on foreign financing but its resilient economic growth, deep domestic capital markets, large international asset position and large export proceeds mitigate the sovereign's vulnerability to sudden shocks.

It also noted that Malaysia's fiscal deficit will narrow from 2.8% of gross domestic product (GDP) in 2018 as and when strong nominal GDP growth boosts revenues, but material progress is unlikely, absent any meaningful revenue-raising measures. As a result, the debt burden will stabilise at current level of 50.9% of GDP in June 2017, which is significantly higher than the A-rated peer's average of 40.5% as at year-end 2016.

Moody's said government guarantees are unlikely to present material contingent liability risk, as they are issued through a stringent selection process and most companies that benefit from them are profitable and competently managed. At end-2016, the total debt of non-financial public sector corporations stood at 16.6% of GDP, two-thirds of which were guaranteed by the government.

On the issue of whether household debt presents challenges to Malaysia's macro-financial stability and growth, Moody's said that at 84.6% of GDP at the end of September 2017, Malaysia's household debt levels — while stable — pose downside risks to growth. Nevertheless, such debt does not pose material threats to financial stability. Households have large liquid financial assets to buffer the impact of a potential shock to debt servicing capacity. Moreover, ongoing macroprudential measures will help contain potential further increases in debt.

On a positive side, Moody's said Malaysia will be able to maintain its strong growth trends. In particular, the country's highly diversified and competitive economic structure underpins stable and relatively robust growth trends that have proven to be resilient to external headwinds. The economy's long-term potential growth should stay robust at around 5%, which would be significantly stronger than most other A-rated sovereigns.