The rating agency said although 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 to reserves – as measured by its external vulnerability indicator (EVI) – has been significantly above the 100% threshold for years. Moody’s expects the EVI to stand at 143% for 2018.
It noted that while foreign currency reserves have climbed from a recent trough, they remain lower than aggregate cross-border debt due over the next year.
“An active non-resident investor presence in Malaysia’s financial markets also leaves it vulnerable to sudden swings in capital flows.”
Moody’s said the reserve volatility will be amplified as well due to high foreign investor participation as a result of the exposure to to sudden movements in portfolio investment flows.
Foreign holdings of outstanding Malaysian government debt stand at about 24%, while non-residents account for nearly 27% of total stock market capitalisation.
Moody’s said a rise in short-term external debt could exacerbate fragilities, with total external debt accounting for 72.6% of gross domestic product (GDP), which is in line with the median for A-rated sovereigns.
“However, since mid-2016, short-term external debt by original maturity has risen to 45.1% of external debt, presenting rollover risks. Almost 60% of total external debt is denominated in foreign currency, which gives rise to some exchange rate risk.”
Moody’s said while prudent monetary policy and a large domestic institutional investor base buffer the impact of capital flow volatility, the current account surplus has steadily narrowed, providing less of a cushion now.
Overall, Moody’s said Malaysia’s credit profile is resilient to an escalation in external vulnerabilities.
“It would take a significant deterioration of external metrics from current levels for Malaysia’s credit profile to weaken. Other sources of credit risk would be a sharp growth slowdown or meaningful deterioration in the public finances, neither of which we deem likely at this time,” it opined.