PETALING JAYA: While Moody’s Investors Service has forecast an economic growth of 6% for Malaysia in 2022, there remain downside risks from the Russia-Ukraine war, high inflation, new Covid-19 variants as well as lockdowns in China.

       Nishad Majmudar, who is assistant vice-president and analyst (sovereign risk group and credit strategy and research) at Moody’s said besides the war, any potential surge in inflation would cause Malaysia to react in terms of policy rate normalisation.

       “Our assumption is that the central bank will start to tighten policy in the second half of this year,” Nishad told reporters at an online briefing entitled Inside Asean: Malaysia, yesterday.

       “However, on the inflation front, given the existence of price controls, I think inflationary pressures are not likely to be as prevalent in Malaysia as they might be in other countries where there is full pass through of the commodity prices,” he added.

       While the credit rating agency is also cognisant of risks of border closures or movement restrictions which may result from new Covid-19 variants, Nishad noted that the Malaysian government has “indicated its interest in keeping the economy open” and the country had transitioned to the endemic phase on April 1.

       He also pointed out that Moody’s has revised marginally downwards its growth forecast for China this year to 5.2%, and 5.1% for 2023.

       “With the lockdowns in China, as well as some of the potential supply chain issues that may affect some of the countries importing inputs from China, such as Malaysia, that could also result in weaker manufacturing growth,” said Nishad.

       Regarding the country’s credit profile, he said there are “fiscal risks on the horizon, given that the debt burden has risen over time during the pandemic, and we don’t see any significant revenue reforms on the horizon.”

       Nishad added that the government’s fiscal trajectory “does entail elevated risk to the credit profile, and this is where we see the greatest downside pressure.”

       He pointed out that the credit rating agency expects the government debt burden to stabilise in 2022 at 65% of gross domestic product or lower, and Moody’s has included the explicit liabilities of 1MDB in its definition of government debt.

       “We do see that the debt burden will stabilise or peak this year, but only gradually consolidate over time, given the government’s expansionary fiscal stance,” said Nishad.

       He said that in the absence of further revenue reforms, this will limit the government’s fiscal flexibility over time.

       “Therefore, the outlook for fiscal policy is highly conditional upon the growth recovery this year. Weaker growth trajectory in 2022 could result in some fiscal slippage and higher debt levels, given that the government intends to maintain high levels of expenditure to ensure economic recovery,” said Nishad.

       “The credit rating agency has assumed there will be no major revenue reforms prior to the potential snap election this or next year, “given the political constraints around that.”

       “We don’t expect GST (goods and services tax) or even the Fiscal Responsibility Act legislation to be considered - don’t expect passage of that this year, or the first half of next year,” said Nishad.

       Meanwhile, Moody’s also expect the earnings of Malaysian banks to improve further in 2022, driven by a reduction in the loan loss reserves.

       “If economic conditions normalise further in the second half of 2022, that will allow some banks to start releasing loan loss reserves that were set aside,” said Li Tengfu, who is assistant vice-president and analyst (financial institutions group) at Moody’s Investors Service.

       However, he pointed out that the increase in profits will be partially offset by Cukai Makmur (the one-time prosperity tax).

       Li also said the net interest margin (NIM) for Malaysian banks “will be fairly stable in 2022.”

       He noted that while loan growth will likely accelerate this year, the effect on NIMs will be largely offset by increasing competition for deposits as the economy starts to recover as well as the entry of digital banks.

       “Rate hikes would definitely help NIM expansion for banks, but it may not be material this year, given that the central bank has so far remain fairly accommodative,” said Li.

       Regarding banks’ asset quality, Li said it would be broadly stable as the non-performing loan (NPL) ratio has remained fairly steady during the pandemic due to various government support measures.

       “Although most of the repayment assistance programmes will expire by June 2022 (when the flow of bad loans will start to normalise), we think that the NPL ratio will remain broadly stable because of the rebound in economic activities, as well as some of the targeted restructuring programmes offered by AKPK (Credit Counselling and Debt Management Agency) and the banks,” he said.

       Li also noted that Malaysian banks have been fairly proactive in setting aside loan loss reserves.

       “The NPL coverage of Malaysian banks has increased quite substantially, and we think that the level of reserves is sufficient to absorb credit losses when the support measures taper off. Also, most of the repayment assistance are for the retail and SME (small and medium-sized enterprises) segments, which are largely secure,” he said.

       In terms of the capitalisation of Malaysian banks, Li noted that this had increased last year as banks conserve capital due to the economic uncertainty.

       “The banks had cut dividends and increased the proportion paid under various dividend reinvestment plans. Going forward, in line with the improving economic conditions, the banks would likely accelerate their loan growth and start to normalise some dividend payouts and that will lead to a decline in capital levels, but from fairly high levels,” he said.

       Meanwhile, the Asian Development Bank (ADB) has forecast Malaysia’s economy to grow by 6% in 2022 and moderate to 5.4% in 2023.

       In its Asian Development Outlook report, the ADB noted that the country’s growth had recovered in 2021, supported by rising global demand for manufactured exports and terms-of-trade gains from exports of natural resources, and strong domestic demand.

       However, the ADB also noted that rising imports from a pick-up in domestic investment had trimmed the current account surplus.

       Another challenge is inflationary pressure, which is “building on rising energy prices, the phasing out of an electricity subsidy and continuing supply disruptions.”

       “Assisting poor households to return to the pre-pandemic norm is the major policy challenge,” said the ADB.