KUALA LUMPUR: If the Russia-Ukraine war is protracted, its negative impact on Malaysia’s economy would be transmitted through higher inflation (due to a surge in commodity prices), supply chain disruptions, a potential dampening of global demand and financial markets instability.

       CLICK TO ENLARGE

       In its latest Corporate Default and Rating Transition Study, RAM Ratings said the outbreak of the war poses a surprise downside risk to its 6.8% growth projection for Malaysia’s 2022 gross domestic product (GDP).

       However, RAM Ratings manager (data analytics) Chuan Shyang Lin noted that the direct impact on Malaysia’s economy is cushioned by the low trade links with Russia and Ukraine – less than 1% of Malaysia’s total trade.

       “We will continue to closely monitor developments and update our forecasts in the second quarter of 2022 if required,” he said.

       Other risks on the radar include new Covid-19 variants of concern, prolonged supply chain disruptions, over-aggressive United States Federal Reserve (Fed) policy normalisation and any other escalation in geopolitical tensions.

       However, RAM Ratings manager (data analytics) Chuan Shyang Lin noted that the direct impact on Malaysia’s economy is cushioned by the low trade links with Russia and Ukraine – less than 1% of Malaysia’s total trade.

       The study also noted that Malaysia’s GDP growth of 3.1% in 2021 was a welcome contrast to the steep 5.6% contraction in 2020, albeit lower than the initially anticipated expansion of 6.5% to 7.5%.

       The economy grew 7.1% in the first half of 2021 on the back of robust exports but tumbled in the third quarter following a surge in Covid-19 infections that saw the reimposition of movement controls.

       “A strong vaccination drive allowed the economy to subsequently reopen and hefty government stimulus and aid measures worth RM530bil helped cushion the adverse impact of the pandemic, enabling the country to end the year on a positive note,” said Chuan, who is also co-author of the study.

       Given still-challenging growth prospects and uncertainties, RAM’s rating actions stayed marginally negative in 2021.

       There were six downgrades and five upgrades.

       However, inclusive of rating outlook revisions, the year turned out positive, with a total of 11 positive actions in contrast to eight negative actions.

       No debt issuer defaults were recorded during the year.

       Meanwhile, notwithstanding the brighter economic prospects, RAM Ratings is seeing some negative bias in rating actions for a few more quarters in light of the larger number of debt issuers on negative outlook (12) versus those on positive (four) as at end-2021.

       “Looking ahead, net rating action could still swing negative as issuers with negative outlook pegged to their ratings trump those with positive outlooks by a ratio of 3:1 as at end-2021,” said Chuan.

       “All said, the credit risks of RAM’s rated portfolio remained contained.

       “About 80% of rated issuers have AA or higher ratings, indicating strong creditworthiness and a capacity to meet debt obligations on a timely basis.

       “Only a very small number of issuers, comprising about 2% of total rated issuers, is deemed to be at a high risk of default in the next 12 months.

       “However, these high-risk issuers are mostly wrapped by credit support from guarantors rated at least AA1, which mitigates the investor’s expected loss should a default occur,” he added.

       RAM Ratings also analysed the performance of 725 non-financial Bursa Malaysia corporates and noted that earnings performance expectedly slipped in the third quarter of 2021 (median earnings before interest, taxes, depreciation, and amortisation: 22.3% decline year-on-year) amid the weaker economic conditions.

       This was more evident for smaller firms (41.5% decline) relative to larger peers (11.6% decline).

       Even so, the median credit metrics for most listed corporates remained intact.

       “The median debt-to-equity ratio, an indicator of indebtedness or leverage, stood at 0.21 times while the median earnings-to-debt, a measure of debt coverage, was still comfortable at 0.29 times.

       “Generally, by RAM’s benchmarks, a leverage below 0.6 times and debt cover above 0.2 times are deemed conservative,” said Chuan.

       Meanwhile, the majority of firms (71%) had adequate liquidity, with current assets exceeding their near-term liabilities.

       On average, companies had sufficient reserves to support four months of operational expenses.

       Smaller firms kept an even higher buffer of seven months, possibly due to weaker access to financing.

       Also, there was indication that corporate earnings had picked up in tandem with the economy’s rebound of 3.6% in the fourth quarter of 2021.

       The study also highlighted that total Sustainable and Responsible Investment (SRI) sukuk and bond issuance in the country reached a record high of RM4.8bil in 2021, after a temporary setback in 2020 amid the global pandemic.

       “Equivalent to only about 4% of total bond and sukuk issuance last year, this signals tremendous headroom for growth,” noted Chuan.

       As at end-2021, 28 issuers from eight sectors have issued SRI bonds and sukuk.

       2021 was particularly active, with 11 issuers making their initial foray into the green bond and sukuk space.

       Renewable energy companies (13 in total) were the most prolific issuers of environmental, social, and corporate governance (ESG) bonds and sukuk.

       “Besides positive profiling and incentives for issuers, we believe this is driven by the government’s aim of achieving 40% renewable energy mix by 2035. This green agenda is estimated to result in a cumulative investment of about RM53bil between 2021 and 2035. SRI sukuk issues from the infrastructure sector is poised to see further growth,” said Chuan.

       The property sector had the second largest issuance value, albeit driven mainly by PNB Merdeka Ventures Sdn Bhd’s RM2bil ticket to fund the development of the Merdeka 118 tower.

       Meanwhile, the financial services came in third, led by Cagamas Bhd’s issuance to fund the purchase of eligible Islamic financing for affordable housing.

       Notable issuances in 2021 include Yinson Holdings Bhd’s RM1bil sustainability-linked sukuk.

       Issuers of sustainability-linked instruments pledge to achieve pre-identified ESG targets and their performance here is directly linked to the coupon or profit rates paid.

       The firm is rewarded with cost savings if sustainability targets are met (and vice versa) while investors, besides financial returns, receive higher assurance that their funds help contribute to tangible ESG improvements.