Brexit and risks facing ASEAN Sovereigns.

Malaysia’s credit fundamentals in comparison to regional countries.

Esther Lai,

Head of Sovereign Ratings

18 July 2016

Providing Direction

Opinions That Shape The Market

2

OUTLINE

I. BREXIT AND CHANGING RISKS FOR ASEAN SOVEREIGNS

II. MALAYSIA’S CREDIT FUNDAMENTALS

3

Growing Sovereign Coverage

Japan

gAA3 (pi)/negative

Bahrain

gBBB2(pi)

South Korea

gA1(pi)/positive

United Arab Emirates

gAA2(pi)

Kazakhstan gBBB2(pi)

Indonesia

gBBB2(pi)

Kuwait

gAA3 (pi)

Saudi Arabia

gAA2(pi) /negative

Singapore

gAAA(pi)

Malaysia

gA2(pi)

India

gBB2 (pi)/positive

Philippines

gBBB3(pi)

Thailand

gBBB1(pi)

Turkey

gBBB3(pi)/negative

Qatar

gAA3 (pi)

Vietnam

gBB3(pi)

Laos

gB1 (pi)/negative

Oman gA1(pi) /negative

Cambodia

gB1(pi)

China

gAA3 (pi)

Myanmar

gB2 (pi)

Brunei

gA1(pi)

Property of RAM Rating Services Berhad. Content is accurate at the time of printing

4

ASEAN Sovereign Ratings

Country Global Rating ASEAN Rating

Brunei gA1(pi)/stable seaAAA(pi)/stable

Cambodia gB1(pi)/stable seaBB3(pi)/stable

Indonesia gBBB2(pi)/stable seaAA3(pi)/stable

Laos gB1(pi)/negative seaBB3(pi)/negative

Malaysia gA2/stable seaAAA/stable

Myanmar gB2(pi)/stable seaB1(pi)/stable

Philippines gBBB3(pi)/stable seaA2(pi)/positive

Singapore gAAA(pi)/stable seaAAA(pi)/stable

Thailand gBBB1(pi)/stable seaAA1(pi)/stable

Vietnam gBB3(pi)/stable seaBB1(pi)/stable

Global and ASEAN Rating Scale : different perspective of government risk ASEAN sovereign ratings broadly stable

5

Brexit to Malaysia’s trade

9.6% 9.3%

7.9%

8.1%

8.5%

8.9%

1.1% 1.0%

1.0% 1.0%

1.0%

1.2%

2012: European Sovereign

Debt Crisis

-60

-40

-20

0

20

40

60

80

-15%

-10%

-5%

0%

5%

10%

15%

20%

2010 2011 2012 2013 2014 2015

Exp

orts

(R

M b

illio

n)

Exp

ort

Gro

wth

(%

)

Exports: EU excl. UK (RHS) Exports: UK (RHS)

Total Export Growth Exports Growth: EU excl. UK

*Values represent % of total exports

6

Brexit to Malaysia’s trade

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0

1

2

3

4

5

6

Food a

nd

Liv

e A

nim

als

Bevera

ges

and T

obacco

Cru

de M

ate

rials

In

edib

le

Min

era

l Fuels

Anim

al,

Vegeta

ble

Oils

and F

ats

Chem

icals

Manufa

ctu

red G

oods

Machin

ery

and

Tra

nsport

Equip

ment

Mis

cellaneous

Manufa

ctu

red A

rtic

les

Oth

ers

Percen

tag

e o

f T

ota

l (%

)

Exp

orts

(R

M b

illio

n)

UK's Share of Exports Percentage of Product Group's Total Export (RHS)

7

Brexit to Malaysia’s FDI

2012: European Sovereign Debt Crisis

-20%

-10%

0%

10%

20%

30%

40%

-10

-5

0

5

10

15

20

2010 2011 2012 2013 2014 2015

% o

f T

ota

l In

ward

FD

I (

%)

In

ward

FD

I (

RM

billio

n)

Inward FDI from UK Inward FDI from Europe (excl UK)

Inward FDI from UK as % of Total FDI [RHS] Inward FDI from Europe (excl UK) as % of Total FDI [RHS]

8

Limited direct impact to ASEAN trade & FDI

0%

5%

10%

15%

20%

25%

30%

UK EU (excl UK)

Percentage of total exports

0%

10%

20%

30%

40%

50%

60%

2014 2015

Percentage of total investments

2013/2014 for Brunei

9

Uncertainties on EU a greater concern

Brexit an uncharted territory

Economic and political uncertainties heightened

IMF cut global growth - 2016 : 3.1% from 3.2%, 2017 : 3.4% from 3.5%

No rating impact for ASEAN sovereigns so far

EU risks remain on the radar

10

Risks for ASEAN sovereigns - China

China a bigger trade and investment influence

Concerns on sharp China slowdown reduced

Policy levers ample

gAA3(pi)/stable; seaAAA(pi)/stable

-20%

-10%

0%

10%

20%

30%

40%

50%

Rail Highway Civil aviation

Freight trends

0

50

100

150

200

250

300 Debt (% GDP)

11

Risk for ASEAN sovereigns - politics

Political developments affect sovereign creditworthiness

Cabinet reshuffle in Malaysia, Thailand, Indonesia

Leadership changes in Vietnam, Myanmar, Philippines

Geopolitical tensions expected to be restrained in South China Sea

12

Risks for ASEAN Sovereigns - Recap

Brexit – limited direct impact, risks from broader EU remains

China a bigger concern although risks of sharp slowdown has eased

Political developments will shape future rating transitions

13

Malaysia sovereign rating

gA2/stable; seaAAA/stable

Resilient growth backed by strong macro fundamentals

Structurally sound external position

o Persistent deficits, elevated debt, rising contingent liabilities

o Political developments could lead to policy challenges

14

Resilient growth

2016 growth 4.2% for Malaysia

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

MY IN PH SG TH VN

2013 2014 2015

% change GDP growth

15

Structurally sound external position

Current account to narrow : 1% surplus 2016

Export diversity buffers weak external demand and low commodity prices

-5

0

5

10

15

20

25

MY IN PH SG TH VN

2012 2013 2014 2015

Current account performance

% GDP

16

Weak fiscal metrics

Persistent deficits but improving trends

Fiscal reforms supportive of consolidation

0 2 4 6 8

10 12 14 16 18

2009 2010 2011 2012 2013 2014 2015

%

-10

-5

0

5

10

15

20

2009 2010 2011 2012 2013 2014 2015

% Supplies and services variance (% budget)

-5

-4

-3

-2

-1

0

1

2

MY IN PH SG TH VN

Fiscal balance av 2010-2015

Emoluments variance (% budget)

17

Weak fiscal metrics

Debt level high and sticky

Growing contingent liability; no immediate liquidity risk

0

10

20

30

40

50

60

70

MY IN PH TH VN*

2.9

12.3

34.3

26.4

0

5

10

15

20

25

30

35

40

2016 2017-2020 2021-2030 2031-2045

1 Malaysia Development Berhad

Danainfra

Pengurusan Air SPV Berhad

Perbadanan Tabung Pendidikan Tinggi Nasional

Prasarana

Projek Lebuhraya

Usahasama Berhad

Turus Pesawat

RM billion

Year of debt maturity

Guaranteed debt

10

11

12

13

14

15

16

0

50

100

150

200

2010 2011 2012 2013 2014 2015 As a % of GDP (RHS)

RM bn

%

Debt/GDP %

Government guarantees

18

Political developments

Domestic politics – evolving

Risk on policy effectiveness ?

Contingent liability raised a notch

19

Malaysia Sovereign Rating - Recap

gA2 and seaAAA, stable outlook

More downside than upside pressures

Downward triggers

o Deterioration in government finances

o Worsening of domestic politics, resulting in policy ineffectiveness

o Prolonged current account deficits

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