Banks in Malaysia benefit from diversified and competitive economy - Moody's

The banks are capitalising on Malaysia's strong executive and legislative institutions that have consistently demonstrated effective macroeconomic policymaking as evidenced by the country's track record of financial stability.

"We also expect Malaysia's real gross domestic product (GDP) to rebound to 5.0 to 5.5 per cent in2021 after a 5.6 per cent contraction in 2020 because of disruptions arising from the coronavirus pandemic," the rating agency said in a research note today.

Moody's expects Malaysia's growth prospects to remain strong, underpinned by well-developed infrastructure, competitive services, and manufacturing sectors, as well as ample natural resources, and the resiliency of its growth is also supported by a highly diversified economy.

For 2021, it said Malaysia's real GDP rebound will be driven by base effects and the government's stimulus packages, although with movement and activity restrictions due to still high daily COVID-19 infections, albeit less stringent compared to the second quarter of last year, weighs on the recovery.

The pace of economic recovery will also depend on the rate of immunisation rollouts and vaccine efficacy both domestically and globally, it said.

Moody's also highlighted that its assessment of Malaysia's institutional strength reflects the country's improving rule of law, strong executive and legislative institutions and track record of effective macroeconomic policymaking.

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 andas uncovered from the 1Malaysia Development Bhd (1MDB) case, it said.

"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 8.0 per cent 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.

In response to the pandemic, it noted that the central bank has eased monetary policy and implemented numerous liquidity measures to support households and businesses and provided financing schemes for small businesses, while allowing banks to defer and restructure loan repayments of affected borrowers.

The government also announced economic packages totaling RM305 billion (23 per cent of GDP) in2020, and indicated its commitment to support the economy through its RM322.5 billion budget for 2021, it said.

However, the rating agency noted that 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," it shared.

On the assessment of credit conditions in Malaysia, Moody's said it reflects asset risks to banks because of the elevated leverage among households and businesses.

Household debt as a percentage of GDP rose to 93.3 per cent as of the end of 2020 from 82.9 per cent a year ago, although the increase was driven by GDP contraction rather than credit expansion.

Similarly, it said the non-financial corporate debt-to-GDP ratio rose to 110.0 per cent as of the end of 2020 from 99.4 per cent a year ago.

"The high leverage will exacerbate challenges faced by borrowers during periods of economic downturns," it noted.

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, it said.

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 per cent and 17 per cent 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 added.