TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
M'sia, Indonesia are not weak links, says Nomura Research
Malaysia and Indonesia look like the âweak links in the region, but they actually have better metricsâ compared with similarly rated sovereigns, including commodity-exporting emerging market (EM) peers, according to Nomura Research
Change Size
M
alaysia and Indonesia look like the 'weak links in the region, but they actually have better metrics' compared with similarly rated sovereigns, including commodity-exporting emerging market (EM) peers, according to Nomura Research.
It estimated that there was a scope for fiscal stimulus of about 1 per cent-2 per cent of gross domestic product (GDP) that could be quickly deployed to support growth.
The research house concluded that while there were some external vulnerabilities, risks appeared manageable and were far from painting a crisis.
Nomura said the two commodity exporters in Asean, Indonesia and Malaysia, have had the worst performing currencies in the region.
However, there are factors in these two countries that still set them apart from other EMs and similarly rated sovereigns.
'Malaysia seems to have a weak fiscal position, but is still running a current account surplus. Yet fiscal consolidation remains on track ' the fiscal deficit narrowed to 2.8 per cent of GDP in first half of 2015, leaving room to meet or even beat the government's target of 3.2 per cent for the full year (we expect 3.0 per cent),' it added.
Nomura said the government had removed fuel subsidies and proceeded with the unpopular move of implementing the goods and services tax in April, which should help offset the impact of lower oil prices.
'Malaysia's current account remained in surplus and was one of the highest among its ratings peers, having weathered the fall in commodity prices and flooding that disrupted palm oil production. GDP growth is likely to remain resilient this year, slowing to 5 per cent from 6 per cent last year, which is likely to still be better than Malaysia's EM peers, reflecting a diversified economy,' it added.
Nomura said in US dollar terms total external debt had increased sharply, in some cases it had doubled from pre-global financial crisis levels (Indonesia and Thailand).
However, relative to gross national income (GNI), total external debt ratios across the region were not only more stable, but are well below comparable data before the Asian crisis.
The research house, however, noted that not all components of external debt indicated a risk of an increase in the debt service burden owing to exchange rate depreciation.
All countries have adopted the IMF-prescribed methodology to count the stock of non-resident holdings of local currency denominated debt as part of total external debt.
'As these holdings have increased in recent years, stripping them out would mean vulnerability from foreign exchange (FX) movements falling materially further. This is the case in Indonesia, Thailand, and Malaysia,' Nomura said.
It estimated that the external debt service burden would increase in Indonesia, Malaysia, and Thailand by 0.7 per cent, 1 per cent, and 0.3 per cent of GDP, respectively for this year.
Despite the higher burden, Nomura said it was 'manageable' and might still be lower taking into account the fact that some of these liabilities are from sectors that tend to have matching FX revenues or assets and increasing hedging activities.
'In Malaysia, the central bank's latest stress tests show that an FX shock would have only a limited impact on the ability of corporates to service their debt,' noted Nomura.
Nomura took a 'relatively more sanguine' view on the short term external debt of the banking sector in Malaysia, which had risen substantially in the last few years and now makes up nearly 20 per cent of total external debt, and may be a significant contributor to the increase in headline external debt ratios.
'This segment of external debt likely reflects rising interbank transactions with foreign banks, as is mirrored in the rise in the banking sector's external liabilities due to financial institutions.
'We believe the deepening of Malaysia's financial markets led to foreign banks channelling more funds in the form of interbank loans to their Malaysian subsidiaries,' it said.
Furthermore, Nomura noted that capital-raising by Malaysian banks was mainly ringgit denominated. There has been an increase in working capital-related FX funding, but this is mainly in the medium/long-term segment and quantum is much smaller.
'Bank Negara (central bank) also mentioned in its quarterly bulletin for second quarter 2015 that this debt does not pose an immediate claim on international reserves as it is mostly covered by external assets in the banking sector.'
The research house pointed out that the key difference was that in the run up to the 1997-98 Asian crisis most Asian countries had fixed exchange rate regimes, which back then initially supported the region's export oriented growth policies, but eventually generated distortions and resulted in large real exchange rate overvaluations, precipitating a sharp adjustment and then a crisis.
'Today, in our view, central banks in the region remain committed to flexible exchange rates and have resisted draconian capital controls in recent episodes,' it said.
Malaysian officials have explicitly stated that they were not looking to impose capital controls, which Nomura viewed as a credible commitment, consistent with past rhetoric.
Nomura said although monetary policy in Asean was relatively constrained by high inflation (Indonesia, Malaysia), and limited policy space (Thailand), there was plenty of scope for expansionary fiscal policy.
'Looking at this year's weak budget execution so far, we estimate fiscal stimulus worth between 1 per cent and 2 per cent of GDP can be deployed in the near term without breaching budget fiscal deficits,', it said, adding that public indebtedness in the region was also at relatively low levels and hence scope for more stimulus was sizeable.
It said the exception was Malaysia with public debt near the self-imposed ceiling of 55 per cent of GDP. (++++)
