1. No category

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
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II. HOW STRESSED ARE MALAYSIA’S CREDIT FUNDAMENTALS? III. POTENTIAL EFFECTS OF A DOWNGRADE IV. IMPLICATIONS FOR THE PROPERTY SECTOR 2 O
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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
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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
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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
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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
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26