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Moody's Investors Service says that it would take a significant deterioration of Malaysia's (A3 stable) external metrics from current levels for the country's credit profile to weaken.
Moody's conclusion is contained in its just-released report titled "Government of Malaysia: Credit profile relatively resilient despite external vulnerabilities".
The report explains that Malaysia's foreign currency reserves have climbed out of a recent trough, but remain lower than aggregate cross-border debt due over the next year. An active nonresident investor presence in Malaysia's financial markets also leaves the country vulnerable to sudden swings in capital flows.
Since mid-2016, short-term external debt by original maturity has risen to nearly half of external debt, presenting rollover risks. In addition, almost 60% of total external debt is denominated in foreign currency, which gives rise to some currency risk.
While foreign reserves are still larger than short-term debt by original maturity, once currently maturing medium- and long-term debt is added, the ratio of annual external liabilities due over the next year to reserves (the external vulnerability indicator, or EVI) has been significantly above the 100% threshold for years. Moody's forecasts Malaysia's EVI at 143% for 2018.
However, currency flexibility, prudent monetary policy and a large domestic institutional investor base buffer the impact of capital flow volatility, with large export proceeds and external assets acting as a further cushion.
Moody's points out that since its assessment of Malaysia's overall sovereign credit profile incorporates its vulnerability to capital volatility, trends in the EVI and the basic balance, its credit profile is relatively resilient to periods when such external volatility heightens. Other sources of credit risk would be a sharp growth slowdown or meaningful weakening in public finances; neither factors of which Moody's deems likely at this time.
