Is There a Potential Downgrade with the Possible Widening in Malaysia’s Deficit Due to Lower Oil Revenue and High Household Debt? Dr. Yeah Kim Leng Dean, School of Business Malaysia University of Science and Technology (MUST) 3rd March, 2015 Wisma REDHA 1 I. WHAT DETERMINES SOVEREIGN CREDIT RATING? O U T L I N E II. HOW STRESSED ARE MALAYSIA’S CREDIT FUNDAMENTALS? III. POTENTIAL EFFECTS OF A DOWNGRADE IV. IMPLICATIONS FOR THE PROPERTY SECTOR 2 O U T L I N E I. WHAT DETERMINES SOVEREIGN CREDIT RATING? 3 I. What determines sovereign credit rating? Salient features of sovereign ratings Ordinal measure of the ability and willingness of sovereign governments to repay their obligaQons. Usefulness: Signal for countries' economic, financial and poliQcal situaQons. Impact: Determines access to capital markets and cost of funds (risk premium) Oligopoly – S&P’s, Moody’s & Fitch Split ra7ngs -‐ disagreements among CRAs is common Order of influence: S&P > Moody’s > Fitch 4 I. What determines sovereign credit rating? Key issues over sovereign ratings PredicQve quality • Doubaul accuracy due to limited data. • No advanced economy had defaulted unQl recently. • PredicQve success subject to self-‐ fulfilling prophecy. Other issues • RaQngs are pro-‐cyclical. • Downgrades faster than upgrades. • Excessive downgrades during 1998 AFC, 2008 GFC and Eurozone sovereign debt crisis. • Cultural and home bias. 5 I. What determines sovereign credit rating? Key sovereign rating factors Qualitative & quantitative criteria • PoliQcal event risk (war, civil unrest, regime change) • InsQtuQonal quality • Policy flexibility • Liquidity • Public sector external debt • Bank and private sector external debt PoliQcal stability Economic prospects External flexibility Fiscal flexibility • Economic structure – diversity & resilience • Growth & variability • Income disparity • Openness to trade • Monetary stability • Revenue & expenditure • Fiscal balance • Off-‐budget & conQngent liabiliQes 6 O U T L I N E II. How stressed are Malaysia’s credit fundamentals? 7 II. How stressed are Malaysia’s credit fundamentals? Comparison with A-‐ peers Economic growth risk Per capita GDP (US$) 23,232 25,000 20,000 16,040 5.0 2.4 3.0 7,905 3.1 2.7 1.4 2.0 0.5 1.0 0.0 21.0 Unemployment rate (% of workforce) CPI infla7on (avg % chg) 20.0 10.0 6.0 5.2 4.0 10,961 0 15.0 7.0 5.0 14,653 5,000 25.0 Real GDP growth (% chg) 6.0 16,919 15,000 10,000 23,775 10.0 10.9 11.0 9.8 2.9 0.0 Source: S& P Sovereign Credit Indicators 9.9 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 5.9 3.1 2.0 0.7 0.0 0.1 0.5 8 II. How stressed are Malaysia’s credit fundamentals? External sector risk Reserves / Current account payments (months) Current account balance / GDP (%) 10 5 6.4 4.9 5.5 1.4 0 -‐5 -‐2.5 -‐2.8 -‐10 -‐15 -‐14.5 -‐20 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Net external liabili7es / Current account receipts (%) 200 150 100 50 0 -‐50 -‐100 155 97 51 -‐24 43 -‐2 -‐69 Source: S& P Sovereign Credit Indicators - 2014 70 60 50 40 30 20 10 0 9.0 6.0 4.2 1.3 1.4 0.4 0.3 Gross public sector external debt / Current account receipts (%) 58 42 18 45 56 37 25 9 II. How stressed are Malaysia’s credit fundamentals? Fiscal risk Fiscal surplus/deficit (% GDP) 2.0 1.0 0.0 -‐1.0 -‐2.0 -‐3.0 -‐4.0 -‐5.0 -‐6.0 -‐7.0 -‐8.0 2 1 0 -‐1 -‐2 -‐3 -‐4 1.7 1.0 Net govt debt (% GDP) 71 80 0.6 60 32 40 -‐1.3 -‐1.3 0 -‐2 -‐20 -‐40 -‐5.7 -‐6.9 -‐43 -‐60 Primary balance (% GDP) 0.1 46 20 -‐3.4 1.6 49 36 Interest payment (% GDP) 0.7 -‐0.9 -‐3.5 -‐2.7 Source: S& P Sovereign Credit Indicators - 2014 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 3.0 2.0 0.7 1.0 2.3 2.5 1.4 10 II. How stressed are Malaysia’s credit fundamentals? Rating forecasts OUTLOOK Nega7ve, Stable or Posi7ve? • No sharp deterioraQon in fundamentals with the excepQon of conQngent liabiliQes (1MDB & others). • Household debt not a significant factor in sovereign raQng as long as per capita GDP growth is maintained. FORECASTS Ra7ng ac7ons in 2015 • No simultaneous downgrade by any 2 of the 3 CRAs. S&P’S Reaffirm • S&P’s – Re-‐affirm at A-‐ with stable outlook (90% chance) or re-‐affirm with negaQve outlook (10%). Moody’s Reaffirm • Re-‐affirm A2 with posiQve outlook (70% chance) or upgrade to A1 (30%). Fitch Reaffirm or downgrade • Re-‐affirm A-‐ (70% chance) or downgrade to BBB+ (30% chance). Source: S& P Sovereign Credit Indicators - 2014 11 O U T L I N E III. POTENTIAL EFFECTS OF SOVEREIGN RATING DOWNGRADE 12 III. Potential effects of sovereign rating downgrade Rating downgrade effects Rated securiQes • Market losses • Higher capital requirements Rated issuers & insurers • Higher funding costs • Loss of market access • Lower capex and reduced borrowings RaQng-‐based investment mandates Contractual raQng triggers • Larger collateral calls • Larger funding needs • Fire-‐sale of government bonds Bonds issued by firms with raQng at country ceiling will be downgraded 13 III. Potential effects of sovereign rating downgrade Rating downgrade effects: Bond yields Yields widen sharply between rating category A and BBB Source: “Sovereign Credit Ra>ngs and Financial Markets Linkages -‐ Applica>on to European Data” by António Afonso, Davide Furceri and Pedro Gomes, Working Paper Series No. 1347, European Central Bank, June 2011. 14 III. Potential effects of sovereign rating downgrade Local vs foreign debt issuance Local currency issues – rated locally; no impact Malaysia's total domestic & international debt securities as at Sept 2014 International debt securities, USD[VALUE] bn (13.4%) Domestic debt securities, USD[VALUE] bn (86.6%) Source: Bank of InternaQonal Seulements 15 III. Potential effects of sovereign rating downgrade Malaysia's outstanding issuance of international debt securities Investors will face a loss in bond value while issuers face higher borrowing cost. RelaQve small amount USD billions 60 50 40 30 20 of bonds issued by non-‐ financial corporaQons 4.1 5.7 4.5 6.2 4.5 5.5 Total USD53.8 bn 34.3 35.0 35.1 33.0 6.5 8.6 9.9 10.8 Dec 2012 Dec 2013 Jun 2014 Sep 2014 10 0 4.5 6.2 Banks Non-‐financial corporaQons Source: Bank of InternaQonal Seulements (BIS) Other financial insQtuQons Government 16 III. Potential effects of sovereign rating downgrade Property & real estate Ringgit bonds Largely highly rated or unrated Total RM28.9 billion facili7es under Property & Real Estate as at end Feb 2015 2.6% of total facilities [CATEGORY (RaQng, RM mn, % of total) [CATEGORY of RM1.1 trillion NAME], RM [VALUE] mn, [PERCENTAGE] [CATEGORY NAME], RM [VALUE] mn, [PERCENTAGE] Source: Bond Pricing Agency Malaysia NAME], RM [VALUE] mn, [PERCENTAGE] [CATEGORY NAME], RM [VALUE] mn, [CATEGORY [PERCENTAGE] NAME], RM [VALUE] mn, [CATEGORY [PERCENTAGE] NAME], RM [CATEGORY [CATEGORY [VALUE] mn, NAME], RM NAME], RM [PERCENTAGE] [VALUE] mn, [VALUE] mn, [PERCENTAGE] [PERCENTAGE] 17 O U T L I N E IV. IMPACT ON THE PROPERTY MARKET 18 IV. Impact on the property sector Banks’ exposure to the property sector Rising share of loans to property sector appears to be tapering off. Banks' lending direction % of total loans Residential property, 29.3 35 30 Working capital, 23.4 Non-resid. property, 13.4 25 20 15 5 Transport vehicles, 12.4 Passenger cars, 11.7 0 Securities, 5.7 10 Source: BNM Monthly Statistical Bulletin January 2015 19 IV. Impact on the property sector Bank lending impact on property sector Loans growth moderating but lending to property sector remains strong, at double-digit. Annual change % 25 20 15 10 5 0 -‐5 -‐10 [SERIES NAME], [CATEGORY NAME], [VALUE]% [SERIES NAME], [CATEGORY NAME], [VALUE]% [SERIES NAME], [CATEGORY NAME], [VALUE]% [SERIES NAME], [CATEGORY NAME], [VALUE]% -‐15 Source: BNM Monthly Statistical Bulletin January 2015 20 IV. Impact on the property sector Bank lending confidence Asset quality improves for residential property loans NPL ratio by segment % of total loans 5.6 6 5 4 3 2 1 4.9 1.5 1.3 0.9 0.8 0 2013 2014 % of total NPLs 45 40 35 30 25 20 1.9 15 1.7 10 5 0 Jan 2015 Source: BNM Monthly Statistical Bulletin August 2014 Share of total NPLs 23.2 22.2 10.1 5.1 2013 7.1 2014 7.3 Jan 2015 21 IV. Impact on the property sector How fast are property prices cooling? MHPI has eased gradually to 7.9% since 4Q2013 after 8 preceding quarters of double-digit rises. % quarterly change (yoy) Malaysia House Price Index as at 3Q2014 20 High-Rise Unit, 9.5 3Q2014 Terraced, 8.6 15 MHPI, 7.9 10 Detached, 7.3 5 0 SemiDetached, 4.6 -5 -10 Source: NAPIC 22 IV. Impact on the property sector Soft landing Average 9.5% rise per annum since 2010 is converging to historical average of 3.2%. Quarterly change (% yoy) Property price growth trends 14 12 9.5% (std dev 2.1%) 10 8 6 4 3.2% (std dev 1.5%) 2 0 Source: NAPIC, own calculations 23 SUMMARY § Low probability of a synchronised sovereign rating downgrade: Of the 3 global credit rating agencies, only Fitch may downgrade Malaysia given its current negative outlook. S&P and Moody’s are llkely to re-affirm Malaysia’s rating at A- and A2 respectively. § Limited potential impact of downgrade: Negative impact of sovereign rating downgrade limited as 87% securities are ringgit denominated. of debt § Implications for the property market: Credit flows to property developers and purchasers are not expected to be affected by a sovereign rating downgrade. 24 SUMMARY (cont’d): § Implications for the property market (cont’d): q Soft landing in property prices due to cooling measures is evident. Slowdown in price increases however will vary by segment and location according to supply-demand dynamics. q Support for property prices and demand: q Ø a moderately strong GDP growth with stable employment and income increases amidst a growing & young population. Ø slower but still positive credit growth underpinned by strong domestic liquidity and continuing credit flows as banks remain healthy. Affordability issues and over-supply in higher end segments exacerbate supply-demand mismatches in selected property segments and locations. 25 Thank you School of Business Enquiries welcome on post-graduate programs in the School of Business: • P h D i n M a n a g e m e n t ( b y R e s e a r c h ) • M a s t e r i n B u s i n e s s A d m i n i s t r a t i o n (MBA) • P r o f e s s i o n a l c o u r s e s ( 2 - 3 d a y s ) i n Risk and Economics run by Centre for Risk and Economics (CFER) GL33, Ground Floor, Block C, Kelana Square No. 17, Jalan SS7/26, Kelana Jaya, 47301 Petaling Jaya, Selangor Darul Ehsan Tel Fax H/P Email Website : +603 7880 1777 Ext. 285 : +603 7880 1762 : +6012 3787866 : [email protected] : www.must.edu.my 26
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