Moody’s Correct in Highlighting Malaysia Risk

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Moody’s warned last week that Malaysia’s foreign reserves are amongst the weakest in Asia.  We agree, and our rating model has Malaysia at BBB+/Baa1/BBB+ vs. actual ratings of A-/A3/A-. 


The next national elections don’t have to called until August 2018.  However, speculation is picking up that Prime Minister Najib Razak may call early elections.  He has fended off a corruption scandal at home, with little apparent impact on his popularity.

The opposition did well in the 2013 elections.  The so-called Pakatan Rakyat coalition won 50.9% of the vote (but only 89 out of 22 seats in parliament) vs. 47.4% (and 133 seats) for the ruling Barisan Nasional coalition.  It was the first election in which Barisan Nasional lost the popular vote.

However, opposition leader Anwar Ibrahim was jailed in 2015.  He is serving a 5-year sentence over what his supporters call a politically motivated charge.  The Pakatan Rakyat coalition imploded after the 2013 election, and was replaced by Pakatan Harapan.  However, that coalition remains weak and divided, unable to even name their candidate for Prime Minister.

Najib remains under investigation by the US Justice Department.  Indeed, there are ongoing investigations in several other countries that include Singapore and Switzerland.  Recall that Najib fired the Malaysian Attorney General that was investigating him and named a new one that then cleared him of all charges.

Relations with the US are likely to remain good, however.  Najib just visited the US at the invitation of President Trump.  During that visit, Najib said two state funds (Khazanah Nasional and pension fund Employees Provident Fund) will invest several billion dollars in US equities and infrastructure projects.  Furthermore, Malaysia Airlines said it is considering orders worth over $10 bln in the next five years from Boeing and General Electric.

Malaysia scores very high in the World Bank’s Ease of Doing Business rankings (23 out of 190).  The best components are protecting minority investors and getting electricity, while the worst are starting a business and paying taxes.  Malaysia does less well in Transparency International’s Corruption Perceptions Index (55 out of 176 and tied with Croatia).


The economy is picking up.  GDP growth is forecast by the IMF to accelerate modestly to 4.5% in 2017 from 4.2% in 2016, before picking up further to 4.7% in 2018.  GDP rose 5.8% y/y in Q2, the strongest rate since Q3 2015.  With monthly data so far in Q3 suggesting further improvement, we see some upside risks to the growth forecasts.

Price pressures bear watching, with CPI accelerating to 3.7% y/y in August from 3.2% in July.  Part of the story reflects this year’s rollback in cooking oil subsidies.  Another part reflects rising oil and energy costs.  Note that core inflation eased to 2.4% y/y in August.  Bank Negara does not have an explicit inflation target, which allowed it to keep rates steady even when CPI spiked to 5.1% y/y back in March.

Despite the uptick in inflation we see steady rates well into 2018.  Bank Negara kept rates steady at 3% on September 7, noting that global growth is “becoming more entrenched.”  It added that Malaysia’s growth will be stronger than earlier expected, but that inflation should continue its moderating trend.  Next meeting is November 9, and no change is expected then.

Fiscal policy has remained loose.  The federal government deficit came in at an estimated -3.1% of GDP in 2016, down from -3.2% 2015.  It is expected to narrow to -3% in 2017 and -2.7% in 2018.  However, the consolidated budget deficit tells a worse story.  It came in at an estimated -7.2% of GDP in 2016, down from -7.8% 2015.  It is expected to narrow to -6.4% in 2017 and -5.6% in 2018.

The external accounts should continue to worsen modestly.  The current account surplus was about 2% of GDP in 2016, and is expected by the IMF to narrow modestly to 1.8% in both 2017 and 2018.  We see some upside potential here, as export growth has rebounded sharply in recent months.

Foreign reserves have moved back above $100 bln for the first time since June 2015.  At $100.5 bln in August, they cover nearly 6 months of imports.  However, reserves barely cover 75% of the stock of short-term external debt.  Moody’s is correct in flagging this vulnerability.  Looking at the rest of Asia, the ratios of short-term debt to reserves are almost all below 35%.  The only two exceptions are Malaysia (the highest at 129%) and India (the second highest at 65%).


The ringgit has done much better after a poor 2016.  In 2016, MYR fell -4% vs. USD and was ahead of only the worst performers ARS (-18%), TRY (-17%), MXN (-16%), CNY (-6.5%), and PHP (-5%).  So far in 2017, MYR is up 7% YTD and is behind only MXN (16%), THB (8%), SGD (+7%), TWD (7%), and KRW (+7%).  Our EM FX model shows the ringgit to have NEUTRAL fundamentals, so this year’s outperformance is likely to ebb a bit.

Before this month’s drop, USD/MYR had traded largely in the 4.25-4.30 range since mid-May.  The pair broke below 4.25 early this month to trade as low as 4.1825, the lowest level since November 2016.  The pair is turning higher, as a bottom near 4.18 appears to be in place.  Retracement objectives from the August-September drop come in near 4.2270 (38%), 4.24 (50%), and 4.2545 (62%).

Malaysian equities are underperforming EM after a poor 2016.  In 2016, MSCI Malaysia sank -2% vs. +7% for MSCI EM.  So far this year, MSCI Malaysia is up 8% YTD and compares to 27% YTD for MSCI EM.  This underperformance should ebb, as our EM Equity model has Malaysia at a NEUTRAL position.

Malaysian bonds have performed OK recently.  The yield on 10-year local currency government bonds is about -29 bp YTD.  This is in the middle of the EM pack.  The worst performers are Czech Republic (+74 bp), China (+59 bp), and Korea (+20 bp), while the best are Brazil (-166 bp), Indonesia (-162 bp), and Peru (-116 bp).  With inflation likely to start falling again and the central bank on hold for now, we think Malaysian bonds will continue performing near the middle of the pack.

Our own sovereign ratings model showed Malaysia’s implied rating steady at BBB+/Baa1/BBB+.  As such, downgrade risks to actual ratings of A-/A3/A- remain on the table.