KUALA LUMPUR (July 28): The immediate concern from the Brexit vote last month would be the impact of potentially significant growth deceleration in the European Union (EU) excluding the United Kingdom (ex-UK), to which Malaysia has a larger exposure in comparison to the UK, said RAM Rating Services Bhd.

In a report today, the ratings agency said contagion risk stemming directly from the UK will have limited implications on Malaysia's exports and direct investments as the UK accounted for a mere 1.2% of Malaysia's exports in 2015.

In comparison, it said, the EU (ex-UK) contributed 8.9%. Between 2011 and 2015, the UK's and Europe's (ex-UK) shares of average outward foreign direct investments (FDI) came up to a respective 3.8% and 8%. FDI from Europe (ex-UK) has also consistently been a major source of investment, as opposed to the UK, which has been divesting in the last few years.

RAM said Brexit does not materially affect Malaysia's respective A2/stable and AAA/stable sovereign credit ratings on the global and ASEAN rating scales currently.

It said the Malaysian government's fiscal position will not be severely deteriorated as a result of financial disruption stemming from Europe due to the low proportion of foreign currency debt, which stood at 3.1% of total government debt.

RAM, however, added downside risks associated with EU growth deceleration and the impact on Malaysia's macroeconomic performance will be monitored going forward.

"Despite the numerous possibilities, we believe that the UK's membership in the European Economic Area is the most plausible and mutually beneficial post-BREXIT outcome. This is because it partially mitigates some of the UK's concerns about its original form of EU membership while retaining just about every benefit of free trade it currently enjoys," it said.

RAM views the Brexit as a dynamic and ongoing event, citing the chaos in UK's domestic political scene as an example and will thus maintain close monitoring of this move into uncharted territory (no country has opted out of the EU until now), to assess its impact on Malaysia's economic and financial performance.