Published on 26 Oct 2018.
RAM Ratings’ recently held Credit Summit 2018 was set against the backdrop of New Malaysia, a term coined following the historic installation of a new government after the 14th General Election in May 2018. Since coming into power just over five months ago, the newly minted Cabinet has made its presence felt in some business sectors, although the general consensus is that policy details are still unclear at this juncture. As with anything new, there is understandably a period of adjustment and uncertainties, but we anticipate more clarity in the coming months.
“This event is timely and provides a platform for RAM to engage investors and other market participants. It enables us to share our views on the potential impact on the domestic economy, our rated portfolio and the broader debt capital market as more policy details emerge,” highlights Foo Su Yin, CEO of RAM Ratings.
On the macroeconomic front, we project a GDP growth of 4.9% for 2018 and 4.5%-5.0% for 2019 – lower than the 5.9% achieved last year. This reflects the lingering spillover effects of the US-China trade war on the external front, along with less infrastructure investment and lower public-sector spending on home ground in the near term. The latter includes our expectation that the Government will not favour any expansionary fiscal policy until its finances improve. Nonetheless, we expect Budget 2019 to provide better insight on the new administration’s plans. “These are pivotal to the formulation of RAM’s final growth projections for 2019,” notes Kristina Fong, head of research.
Amid the Government’s limited fiscal space, modest inflation (forecast at 1.7%-2.5%) and the need to balance the opposing pressures of growth deceleration and capital outflow bias, we envisage Bank Negara Malaysia to remain relatively dovish on monetary policy in 2019, by leaving the OPR unchanged at 3.25%.
Reflecting on this forecast, Esther Lai (head of Sovereign Ratings) says, “The country’s economic fundamentals have traditionally been a key rating strength, and remain so. As the expected slowdown in GDP growth is transitory rather than structural, we do not envisage this to affect Malaysia’s sovereign ratings. On the other hand, the Government’s plans and ability to stem any deterioration in its fiscal position will be crucial to its ratings in the medium term.” The Malaysian Government carries gA2/Stable and seaAAA/Stable ratings by RAM.
The stable outlook on Malaysia’s banking sector also lends credence to the stability of its sovereign ratings. “Although banks may see earnings come under some pressure due to keen competition on both loans and deposits, their asset quality, capital as well as funding and liquidity profiles remain strong,” observes Wong Yin Ching, head of Financial Institution (FI) Ratings. “Malaysian banks’ credit metrics compare favourably against its regional peers. Due to some of the challenges in our neighbouring countries, regionally-active banks face greater stress than those that are domestic-focused,” she adds. RAM rates most of the banking groups in the country.
As it stands, it is clear that the Government is keen to streamline its expenditure; it has set its sights on large public concessions and projects, in line with its pre-election manifesto. In this respect, the construction, toll roads and power sectors – where government involvement and payments are key features – have come under the spotlight. These sectors account for a significant chunk of the debt capital market’s outstanding bonds/sukuk. As such, any action by the Government could have far-reaching consequences on the capital markets’ appetite for the funding of infrastructure development. “For this reason, we believe that the Government will strike a balance between its intentions and any potential impact on the market,” explain Davinder Kaur and Chong Van Nee, co-heads of Infrastructure & Utilities Ratings.
“Even after the dust has settled, infrastructure development and the private sector’s involvement in such endeavours will remain important to the country,” adds Thong Mun Wai, head of Agribusiness, Real Estate and Construction Ratings.
Of the three aforesaid industries, the construction sector has felt the most notable turnaround in fortunes. The new administration has cancelled, renegotiated and/or deferred more than RM140 billion of construction projects, with more likely to come. This has cast a shadow over this sector, which had previously benefitted from public-sector largesse. Amid the uncertainties over job-replenishment prospects and the expected pressure on margins (from closer scrutiny and less favourable terms), we have a negative outlook on this sector.
By contrast, the Government has adopted a more measured approach to its election pledge to abolish toll collections. In August 2018, it announced that any such plan had been put on hold. Given the status quo, we have maintained a stable outlook on the toll-road sector. Similarly, we have also retained the stable outlook on the power and other sectors under the infrastructure & utilities umbrella (i.e. ports, telecommunications and water). This continues to reflect supportive government policies, oligopolistic market structures and/or sturdy demand for their output/services, although there may be some heightened uncertainties for this group, which is inherently policy-sensitive. For these sectors and, indeed, the economy as a whole, a delicate balancing act and consultative approach by businesses and policymakers will be crucial.
Besides the construction sector, four others also carry a negative outlook: automotive, commercial properties, media and oil & gas (O&G) support services. The outlook on these four has remained unchanged from a year ago, and continue to reflect their weak growth prospects (automotive), the persistent oversupply of office and retail space (commercial properties) and the structural shift in the delivery and consumption of content in the media sector. Meanwhile, the outlook on the O&G support services sector remains negative as we expect earnings to stay weak (due to a lag in the pickup of activities), even as crude oil prices trend upwards.
On a brighter note, we have revised the outlook on the retail sector to stable (from negative, in July 2018), driven by more upbeat consumer sentiment and business confidence as well as the introduction of consumer-friendly measures. “The MIER Consumer Sentiment Index finally broke above 100 points in 2Q 2018 – and stayed above 100 in 3Q 2018 – after having been submerged for 15 consecutive quarters. The latest RAM Business Confidence Index readings for 4Q 2018-1Q 2019 are also favourable,” notes Kevin Lim, head of Consumer & Industrial Ratings. Meanwhile, the stable outlook on the two remaining sectors covered by CreditPulse 2018/2019 – oil-palm plantations and residential property – is unchanged from a year ago.
RAM’s CreditPulse 2018/2019: Sector Outlooks & Credit Trends was released in conjunction with the summit. Available for download from our website, www.ram.com.my, this publication offers RAM’s insights on what lies ahead for the economy and key corporate sectors for this year and the next. In view of the recent political developments in the country, this year’s edition includes a special focus on public-private partnerships/private-finance initiatives, The Project Finance Quandary.
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