Providing Direction Opinions That Shape The Market Brexit and risks facing ASEAN Sovereigns. Malaysia’s credit fundamentals in comparison to regional countries. Esther Lai, Head of Sovereign Ratings 18 July 2016
OUTLINE I. BREXIT AND CHANGING RISKS FOR ASEAN SOVEREIGNS II. MALAYSIA’S CREDIT FUNDAMENTALS 2
Growing Sovereign Coverage Kazakhstan gBBB 2(pi) China Turkey g AA 3 (pi) South Korea g BBB 3(pi)/negative g A 1(pi)/positive Kuwait g AA 3 (pi) Japan India g AA 3 (pi)/negative g BB 2 (pi)/positive Laos Bahrain Qatar g B 1 Myanmar g BBB 2(pi) g AA 3 (pi) (pi)/negative g B 2 (pi) Philippines Saudi Arabia g BBB 3(pi) g AA 2(pi) Cambodia /negative g B 1(pi) Vietnam United Arab Emirates g BB 3(pi) g AA 2(pi) Thailand Indonesia g BBB 1(pi) Oman g BBB 2(pi) gA 1(pi) /negative Brunei Malaysia g A1 (pi) g A 2(pi) Singapore g AAA (pi) Property of RAM Rating Services Berhad. Content is accurate at the time of printing 3
ASEAN Sovereign Ratings Country Global Rating ASEAN Rating Brunei gA1(pi)/stable seaAAA(pi)/stable Cambodia gB1(pi)/stable seaBB3(pi)/stable Indonesia gBBB2(pi)/stable seaAA3(pi)/stable Laos gB1(pi)/negative seaBB3(pi)/negative Malaysia gA2/stable seaAAA/stable Myanmar gB2(pi)/stable seaB1(pi)/stable Philippines gBBB3(pi)/stable seaA2(pi)/positive Singapore gAAA(pi)/stable seaAAA(pi)/stable Thailand gBBB1(pi)/stable seaAA1(pi)/stable Vietnam gBB3(pi)/stable seaBB1(pi)/stable Global and ASEAN Rating Scale : different perspective of government risk ASEAN sovereign ratings broadly stable 4
Brexit to Malaysia’s trade 20% 80 1.2% 1.0% 1.0% 1.1% 1.0% 15% 60 1.0% 8.9% 8.5% 9.3% 9.6% 10% 40 8.1% Exports (RM billion) Export Growth (%) 5% 20 7.9% 0% 0 *Values represent % of total exports 2012: European Sovereign -5% -20 Debt Crisis -10% -40 -15% -60 2010 2011 2012 2013 2014 2015 Exports: EU excl. UK (RHS) Exports: UK (RHS) Total Export Growth Exports Growth: EU excl. UK 5
Exports (RM billion) 0 1 2 3 4 5 6 Food and Live Animals Brexit to Malaysia’s trade UK's Share of Exports Beverages and Tobacco Crude Materials Inedible Mineral Fuels Animal, Vegetable Oils and Fats Percentage of Product Group's Total Export (RHS) Chemicals Manufactured Goods Machinery and Transport Equipment Miscellaneous Manufactured Articles Others 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% Percentage of Total (%) 6
Brexit to Malaysia’s FDI 20 40% 2012: 15 30% European Sovereign Debt Crisis % of Total Inward FDI (%) Inward FDI (RM billion) 10 20% 5 10% 0 0% -5 -10% -10 -20% 2010 2011 2012 2013 2014 2015 Inward FDI from UK Inward FDI from Europe (excl UK) Inward FDI from UK as % of Total FDI [RHS] Inward FDI from Europe (excl UK) as % of Total FDI [RHS] 7
Limited direct impact to ASEAN trade & FDI 30% Percentage of total exports Percentage of total investments 60% 25% 50% 20% 40% 15% 30% 10% 20% 10% 5% 0% 0% 2014 2015 UK EU (excl UK) 2013/2014 for Brunei 8
Uncertainties on EU a greater concern Brexit an uncharted territory Economic and political uncertainties heightened IMF cut global growth - 2016 : 3.1% from 3.2%, 2017 : 3.4% from 3.5% No rating impact for ASEAN sovereigns so far EU risks remain on the radar 9
Risks for ASEAN sovereigns - China China a bigger trade and investment influence Concerns on sharp China slowdown reduced Policy levers ample gAA3(pi)/stable; seaAAA(pi)/stable 50% Debt (% GDP) 300 Freight trends 40% 250 200 30% 150 20% 100 10% 50 0% 0 -10% -20% Rail Highway Civil aviation 10
Risk for ASEAN sovereigns - politics Political developments affect sovereign creditworthiness Cabinet reshuffle in Malaysia, Thailand, Indonesia Leadership changes in Vietnam, Myanmar, Philippines Geopolitical tensions expected to be restrained in South China Sea 11
Risks for ASEAN Sovereigns - Recap Brexit – limited direct impact, risks from broader EU remains China a bigger concern although risks of sharp slowdown has eased Political developments will shape future rating transitions 12
Malaysia sovereign rating gA2/stable; seaAAA/stable Resilient growth backed by strong macro fundamentals Structurally sound external position o Persistent deficits, elevated debt, rising contingent liabilities o Political developments could lead to policy challenges 13
Resilient growth 2016 growth 4.2% for Malaysia GDP growth % change 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 MY IN PH SG TH VN 2013 2014 2015 14
Structurally sound external position Current account to narrow : 1% surplus 2016 Export diversity buffers weak external demand and low commodity prices 25 % GDP Current account performance 20 15 10 5 0 MY IN PH SG TH VN -5 2012 2013 2014 2015 15
Weak fiscal metrics Persistent deficits but improving trends Fiscal reforms supportive of consolidation % Emoluments variance (% budget) 2 18 Fiscal balance av 2010-2015 16 14 12 1 10 8 6 0 4 2 0 -1 2009 2010 2011 2012 2013 2014 2015 -2 % Supplies and services variance (% budget) 20 -3 15 10 -4 5 0 -5 -5 MY IN PH SG TH VN -10 2009 2010 2011 2012 2013 2014 2015 16
Weak fiscal metrics Debt level high and sticky Growing contingent liability; no immediate liquidity risk % Guaranteed debt 70 Debt/GDP 60 RM billion 1 Malaysia Development 50 Berhad 40 40 34.3 30 35 Danainfra 20 30 10 26.4 Pengurusan Air SPV Berhad 0 25 MY IN PH TH VN* Perbadanan Tabung 20 % RM bn Pendidikan Tinggi Nasional Government guarantees 200 16 15 12.3 Prasarana 15 150 14 10 100 13 Projek Lebuhraya 5 2.9 Usahasama Berhad 12 50 11 0 Turus Pesawat 2016 2017-2020 2021-2030 2031-2045 0 10 2010 2011 2012 2013 2014 2015 Year of debt maturity As a % of GDP (RHS) 17
Political developments Domestic politics – evolving Risk on policy effectiveness ? Contingent liability raised a notch 18
Malaysia Sovereign Rating - Recap gA2 and seaAAA, stable outlook More downside than upside pressures Downward triggers o Deterioration in government finances o Worsening of domestic politics, resulting in policy ineffectiveness o Prolonged current account deficits 19
Providing Direction ( Opinions That Shape The Market Thank you RAM Rating Services Berhad Suite 20.01, Level 20, The Gardens South Tower Mid Valley City, Lingkaran Syed Putra 59200 Kuala Lumpur T: (603) 7628 1000 / (603) 2299 1000 F: (603) 7620 8251 W: www.ram.com.my
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