Economic Update - The lowdown on rising ST external debt
Malaysia’s overall external debt was RM744.7bn (US$211bn) or 69.6% of GDP at end-2014, with 52% being medium- to long-term debt. The short-term portion stood at RM359bn (48% of total) though it has risen 16.7% p.a. since 2010. Of concern was the low foreign reserves to ST external debt cover of 1.1x in Jan 15. Much of the ST debt is offshore borrowings accrued by the banking sector and tied to trade credits and intercompany loans, which we think reflects acceleration in trade and investment-related hedging. As such, the debt is backed by underlying business activities or assets and is deemed to be less speculative. Moreover, our channel checks indicate that the risks associated with the rise in the external liabilities of FIs are lower than they appear as much of it is hedged, with minimal open positions.
What happened
Malaysia’s short-term (ST) external debt eased to RM359.1bn, equivalent to 48.2% of total external debt or 33.6% of GDP in 4Q14 (RM363.9bn or 49.1% of total external debt in 3Q14) though it has risen by 16.7% p.a. from RM190.7bn in 4Q09. The increase was largely due to the banking sector’s rising ST liabilities. The banking sector’s ST debt has risen 17% p.a. to RM226.3bn in 4Q14 or 63% of total ST external debt. The balance comprises money market instruments (17%) and others1 (20%). Of concern to several investors we met recently was the low foreign reserves to ST external debt cover of 1.1x in Jan 15 (vs. 1.3x in May 2014), which is at the minimum international ratio.
Analysis
The banking sector’s ST liabilities are mostly interbank borrowings (39% of ST debt) which reflect centralised foreign currency liquidity management operations. The balance is non-resident deposits (24%). The banking system’s net external liabilities are currently -RM44.7bn or -4.2% of GDP. Total external liabilities rose 13% p.a. to RM174bn between 2008 and 2014 though it is partly covered by external assets which increased by 11% p.a. to RM218.8bn in the same period. Our channel checks suggest that the risks associated with the rise in the external liabilities of FIs are lower than they appear as much of it is hedged, with minimal open positions.
What we think
The rising trend of ST external debt is partly due to trade credits and intercompany loans, which we think also reflects acceleration in trade and investment-related hedging. As such, the debt is backed by underlying business activity or assets and is deemed to be less speculative. The recent drop in non-resident holdings of ringgit-denominated debt securities (from RM247bn in 3Q14 to RM223.3bn in 4Q14) amid heightened market volatility was mainly attributed to liquidation of foreign holdings of BNM bills and notes, which are instruments used by BNM to sterilise excess liquidity from the banking system. Meanwhile, the non-resident holdings of Malaysian Government Securities (MGS) remained relatively stable.
Source: CIMB Daybreak - 16 February 2015
Malaysia’s overall external debt was RM744.7bn (US$211bn) or 69.6% of GDP at end-2014, with 52% being medium- to long-term debt. The short-term portion stood at RM359bn (48% of total) though it has risen 16.7% p.a. since 2010. Of concern was the low foreign reserves to ST external debt cover of 1.1x in Jan 15. Much of the ST debt is offshore borrowings accrued by the banking sector and tied to trade credits and intercompany loans, which we think reflects acceleration in trade and investment-related hedging. As such, the debt is backed by underlying business activities or assets and is deemed to be less speculative. Moreover, our channel checks indicate that the risks associated with the rise in the external liabilities of FIs are lower than they appear as much of it is hedged, with minimal open positions.
What happened
Malaysia’s short-term (ST) external debt eased to RM359.1bn, equivalent to 48.2% of total external debt or 33.6% of GDP in 4Q14 (RM363.9bn or 49.1% of total external debt in 3Q14) though it has risen by 16.7% p.a. from RM190.7bn in 4Q09. The increase was largely due to the banking sector’s rising ST liabilities. The banking sector’s ST debt has risen 17% p.a. to RM226.3bn in 4Q14 or 63% of total ST external debt. The balance comprises money market instruments (17%) and others1 (20%). Of concern to several investors we met recently was the low foreign reserves to ST external debt cover of 1.1x in Jan 15 (vs. 1.3x in May 2014), which is at the minimum international ratio.
Analysis
The banking sector’s ST liabilities are mostly interbank borrowings (39% of ST debt) which reflect centralised foreign currency liquidity management operations. The balance is non-resident deposits (24%). The banking system’s net external liabilities are currently -RM44.7bn or -4.2% of GDP. Total external liabilities rose 13% p.a. to RM174bn between 2008 and 2014 though it is partly covered by external assets which increased by 11% p.a. to RM218.8bn in the same period. Our channel checks suggest that the risks associated with the rise in the external liabilities of FIs are lower than they appear as much of it is hedged, with minimal open positions.
What we think
The rising trend of ST external debt is partly due to trade credits and intercompany loans, which we think also reflects acceleration in trade and investment-related hedging. As such, the debt is backed by underlying business activity or assets and is deemed to be less speculative. The recent drop in non-resident holdings of ringgit-denominated debt securities (from RM247bn in 3Q14 to RM223.3bn in 4Q14) amid heightened market volatility was mainly attributed to liquidation of foreign holdings of BNM bills and notes, which are instruments used by BNM to sterilise excess liquidity from the banking system. Meanwhile, the non-resident holdings of Malaysian Government Securities (MGS) remained relatively stable.
Source: CIMB Daybreak - 16 February 2015
