Moody's: Malaysian ringgit depreciation has limited overall impact, but weaker commodity prices will weigh on corporate earnings

Moody's Investors Service says that the depreciation in the Malaysian ringgit is manageable for the sovereign (A3 positive), banks and rated corporates, although it indicates a weakening environment.

Moody's views were presented at its inaugural Inside ASEAN -- Spotlight on Malaysia event on August 27, which focused on the impact of heightened market volatility on Malaysia's credit markets. The report also includes the results of audience polling on key issues for the country.

"We see ringgit depreciation as a symptom of declining export revenues, capital outflows, and worsening investor sentiment toward Malaysia," says Rahul Ghosh, a Moody's Vice President and Senior Research Analyst. "These are negatively impacting key credit buffers such as the current account surplus, foreign reserve coverage, and economic growth trajectory."

The Malaysian ringgit has depreciated by approximately 25% against the US dollar in the past 12 months, notes Moody's.

Although Moody's expects its rated corporates--which have natural hedges and better flexibility despite external funding exposure-- to weather the weaker ringgit, lower Brent crude and palm oil prices will weigh on commodity producers' cash generation and earnings.

Moody's polling of over 150 attendees at its event offers insights into what some of the country's largest investors, intermediaries and debt issuers consider key issues for Malaysia going forward.

The majority of market participants surveyed by Moody's expect the ringgit and oil prices to stabilise; 44% expect the ringgit will remain range-bound between - against the US dollar, and 62% expect Brent crude to average $45-$55 per barrel in the coming 12 months.

Finally, the polling showed that market participants still view China's (Aa3 stable) growth slowdown as the largest risk for Malaysian banks, followed by ringgit weakness. From Moody's perspective, Malaysian banks' direct exposure to China is limited, but domestic asset quality may be pressured, given Malaysia's export exposure to the Mainland.

In terms of foreign exchange vulnerability, Moody's notes that foreign currency loans and foreign currency borrowings by Malaysian banks form a modest share of their overall balance sheets.