KUALA LUMPUR (Aug 24): RAM Rating Services Bhd expects a higher risk of default for about 5.7% of its rating portfolio under a worst-case scenario due to the economic impact of lockdown measures to curb the Covid-19 pandemic.

In a statement today about RAM’s half-year ‘Corporate Default and Rating Transition Study’, which provides an update on the credit performance of its portfolio for the first half of the year (1H20), the rating agency said about 4% of its total rated issuers received negative rating actions — be it downgrades or changes in outlook.

“Given the prevailing economic uncertainties, we expect the negative bias to our rating actions to remain in the next few quarters,” RAM said, but stressed that overall credits remain hale with over 80% of RAM-rated issuers being low-risk with a stable outlook.

The rating agency said an analysis of the broader corporate sector suggests that non-financial firms listed on Bursa Malaysia are generally able to ride out a short recession.

“Earnings retreated 11% year-on-year (y-o-y) in the first quarter of the year (1Q20) for some 720 companies; anecdotal evidence suggests further degeneration, by up to 35% (quarter-on-quarter) q-o-q in the second quarter at the height of the lockdown.

“[With] that said, other metrics show signs of fortitude. With low debt levels, debt servicing (as measured by the ratio of earnings before interest, tax, depreciation and amortisation to debt) remains adequate above 0.2 times while liquidity can sustain at least three months of operations, more when supported by fiscal stimuli and bank relief measures,” RAM said.

RAM added that attempts to flatten the pandemic curve have unfortunately also flattened the economic curve, projecting a 4% contraction of Malaysia’s GDP this year with a moderate rebound in 2021.

“This (GDP forecasts) is premised on industry’s ability to return to normal operating capacity and, of course, an effective vaccine on the horizon. Although economic recovery is still uncertain, we remain hopeful,” RAM concluded.

Edited by Lam Jian Wyn