KUALA LUMPUR (March 13): The risk to Malaysia's sovereign rating is limited in the medium term, Malaysian Rating Corporation Berhad (MARC) said today.

In an analysis of Bank Negara’s Annual Report 2014, MARC chief economist Nor Zahidi Alias said this was because the government’s dependance on external financing was minimal and the government had no history of default.

According to Bank Negara 2014 annual report, total outstanding domestic and external borrowings by non-financial businesses continued to grow in 2014 at 6.8% compared to an increase of 10.4% in 2013.

Nor Zahidi said Bank Negara’s stress tests had shown that the solvency of the firms tested remained intact even after discounting the effect of higher asset valuation arising from a weaker ringgit.

“This suggests that most Malaysian firms have adequate revenue generating assets to cover potentially high foreign currency liabilities,” he said.

“Separately, we concur with Bank Negara’ findings that the overall leverage (based on debt-to-equity ratio) of the Malaysian business sector remains intact and stood below the level observed prior to the Global Financial Crisis,” he added.

Nor Zahidi said Marc's calculations (based on the median, average and total debt weighted debt-to-earnings before interest and tax) also suggested that a large proportion of corporate debt was concentrated in a few big and highly leveraged corporations.

He said the overall economic landscape was still supported by a healthy banking sector with capital ratios surpassing the levels of Basel III.

He noted that overall loan growth remained resilient in 2014, spearheaded by lending for residential properties with values remaining relatively high although homes' prices had softened to 4.6% in the third quarter of 2014.

“Macro-prudential measures by BNM continued to dent consumer demand for credit cards, passenger cars and personal loans in 2014 (1.2%, 2.3% and 3.9% respectively) but have not impacted the demand for residential property loans significantly (2014: 13.3%),” he said.

He said MARC’s concern remained on the effectiveness of the measures meant to induce further deleveraging in the household sector.

“Notwithstanding this, the probability of systemic risk is contained by a resilient banking system and greater supervision through the adoption of Basel III requirements,” he said.

However, MARC views with concern that the bulk of household debt (50.5%) belonged to households with income of RM5,000 and below per month, who likely have minimal savings.

Still, it has become the norm for countries with relatively young demographics to have considerably higher household debt (Singapore: 76.3% of GDP, Thailand: 83.5% of GDP), he said.