Published on 26 Feb 2020.
RAM Ratings has released a comprehensive analysis on the impact of the COVID-19 pandemic on the Malaysian economy and our rating portfolio. The COVID-19 outbreak and rapid global transmission pose new downside risks against global growth momentum as well as Malaysia’s economic resilience. In particular, we expect an immediate impact on discretionary services and industries such as domestic tourism, retail and F&B. The services sector is the largest component of Malaysia’s GDP. Given China’s position as the epicentre of the pandemic and a central node in the global supply chain, the consequences of shrinking demand and disrupted supply of manufacturing inputs will be felt across the globe.
Our assessment of COVID-19’s economic ramifications rests heavily on our assumptions about the duration and severity of the pandemic. Our base case assumes six months of depressed private consumption and trade-related growth, which will shave 0.3 percentage points off our existing GDP growth projection of 4.5% for 2020. Based on a more extreme scenario of prolonged disruptions to consumption and supply chains of about nine months, we expect a 0.5 percentage point reduction in GDP growth.
Malaysia’s aviation, gaming and hotel sectors will bear the full brunt of the economic impact from COVID-19. Players in these sectors will likely experience steep declines in revenue and cashflow in 1Q 2020, followed by some degree of recovery the next quarter, before normalising. Despite expectations that the financial impact from COVID-19 will be more severe relative to the outbreak of severe acute respiratory syndrome (SARS) in 2002-2003, the ratings of Malaysia Airports Holdings Berhad (rated AAA/stable), Genting Berhad (rated AAA/Stable/P1) and Genting Malaysia Berhad (rated AAA/Stable/P1) remain anchored by their strong financial profiles and, more importantly, their robust liquidity positions. The ripple effects of the COVID-19 pandemic will be felt by the retail mall, retail, automotive and residential property sectors, although we anticipate these industries to rebound faster when the pandemic ends.
While COVID-19 will weaken some borrowers’ debt-servicing aptitude, the impact on banks’ asset quality is likely to be contained as the major lenders have offered affected clients moratoriums on loan repayments and restructuring or rescheduling. These measures will curb delinquency that could otherwise occur. Even in the worst-case scenario, we expect the additional credit costs from the pandemic to come up to a relatively manageable seven to nine bps. Apart from heftier credit costs, earnings downside will stem from weaker credit demand and potential monetary easing. That said, banks’ sturdy loss-absorption buffers will help them weather the headwinds.
On the infrastructure front, we envisage short-term downside risk for the domestic port sector in view of China’s role as Malaysia’s largest trading partner. Meanwhile, power projects that rely on Chinese manpower for construction, operations and maintenance services, and those that deploy Chinese equipment in plant construction work could be affected by temporary hiccups with respect to manpower and equipment delivery. That said, our stressed analysis does not indicate any immediate liquidity or credit impairment concerns for Kuantan Port (60%-held by IJM Corporation Berhad, which is rated AA3/stable by RAM) and Bintulu Port Holdings Berhad (rated AA1/stable), as well as Telekosang Hydro One Sdn Bhd, Cypark Ref Sdn Bhd, Tadau Energy Sdn Bhd (the senior sukuk issued by these three entities are rated AA3/Stable), and Mukah Power Generation Sdn Bhd (rated AA1(s)/Stable). On the contrary, the utilities, expressway and telecommunication sectors remain largely unperturbed by the pandemic. Despite a potential short-term drop in demand, the RAM-rated entities in these sectors are anticipated to be able to withstand the shocks through the medium to longer term.
In the meantime, RAM-rated commercial mortgage-backed securities (CMBS) transactions, particularly those supported by retail or hotel assets that are already under pressure, will likely encounter greater liquidity pressure and may take longer to recover. There is no major refinancing wall in the coming months and available coupon reserves will address short-term liquidity shortfalls. We may, however, revisit our assumptions if their recovery takes longer than tolerable levels and their assessed capital values are compromised. It is too soon to gauge the impact on transactions secured by consumer loans (such as automotive or personal loans), although we may observe higher levels of delinquency as borrowers’ capacity to repay loans weakens amid temporary pay cuts or slower business. Any transitional reduction in cashflow should be adequately covered by liquidity reserves and collateral support.
The full report is available for download on our website.
Thong Mun Wai
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(603) 3385 2577
About RAM Rating Services Berhad (RAM Ratings)
Established in 1990, RAM Ratings is a leading credit rating agency registered under the Securities Commission’s Guidelines on Registration of Credit Rating Agencies, 2011. In addition to the provision of credit ratings for corporate bonds and sukuk and their issuers, RAM Ratings also provides research and publications on Islamic finance, fixed income and macro-economic and industry analysis as well as data analytics relating to credit risk, counterparty assessments and other related domains.
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