PETALING JAYA: Corporate Malaysia is not expected to see a surge in bankruptcy risks amid persistently high interest rates globally, owing to the magnitude of its interest rate hikes and well-capitalised and regulated banking system.
According to experts, such a risk is remote as the country is in a better position to handle some of the economic challenges compared to its regional peers.
They said furthermore, banks have strong buffers in the form of loan loss provisions and ample liquidity which can absorb if loan delinquencies were to surge.
The banking system buffers are also evident, with loan loss coverage at 118% of impaired loans and an 82% loans-to-funds ratio in September 2023.
With the improvement in the interest coverage ratio and debt-to-equity ratio among businesses in the first half of the year, indebtedness among the corporates are still at a decent level.
The country’s gross domestic product (GDP) rose 3.3% year-on-year (y-o-y) in the third quarter (3Q23), from a near two-year low growth of 2.9% in 2Q23, and beating analysts’ estimates for a 3% y-o-y expansion. On a nine-month basis, GDP expanded 3.9% y-o-y.
The Singapore Straits Times early this month reported that more companies in Asia, including Singapore, are headed for bankruptcy and restructuring this year and next.
It attributed this to persistently high interest rates which are seen as putting stress on corporate balance sheets and leaving increasing numbers of firms in Singapore and across the region at risk of bankruptcy.
Apart from that, the publication said high interest rates have also created an unfavourable borrowing environment, operational challenges and dented consumer spending.
These have resulted in a broad-based increase in distressed companies, unlike previous cycles in Asia where the pain was concentrated in specific industries such as the shipping and oil sectors.
The report from global consultants AlixPartners noted that Asia’s restructuring market is expected to heat up over the rest of this year and into 2024 with financial players expecting a tougher period ahead
Sunway University professor of economics Yeah Kim Leng told StarBiz the data on Malaysia’s corporate bankruptcies and liquidations, as well as banks’ delinquent loans up till September this year, do not exhibit any spike or uptrend.
Although these are lagging indicators, he said the rising trend seen in the United States and elsewhere in Asia may be less pronounced for Malaysia.
He said the less dire scenario could be due to the nature and magnitude of interest rate increases.
“In the United States, the interest rate was raised abruptly to 5% from near zero that persisted for over a decade since the outbreak of the 2009 global financial crisis.
“The sharp interest rate hikes have negatively impacted banks and corporate borrowers which are accustomed to a low interest rate environment.
“In the case of Malaysia, the interest rate was normalised gradually to the pre-Covid-19 pandemic level of 3.25% to 3.5%.
“The interest rate shock is, therefore, less disruptive to the country’s corporates and any distress would likely be caused by slumping sales due to weakening global demand or difficulties in servicing US dollar-denominated debts owing to the ringgit depreciation,” Yeah noted.
Besides being well capitalised and experiencing low loan delinquencies, he said Malaysia’s banks have adequate loan loss provisions to absorb the anticipated rise in delinquencies should the global headwinds intensify next year.
The banks also have ample liquidity while the country’s saving-investment balance remains in a surplus position, thereby providing a buffer against short-term foreign capital outflows. Likewise, Yeah said in the corporate bond market, the credit rating agencies’ surveillance activities do not point to any widespread distress.
MARC Ratings Bhd chief economist Ray Choy said the rating agency does not foresee an unusually large number of bankruptcies in Malaysia.
“Throughout 2023, the gross non-performing loan (NPL) ratio has remained low and stable, hovering around 1.7% to 1.8%, and has not exceeded 2% over the last few years, suggesting a prudent and manageable credit environment.
“Nonetheless, there are some sectors which have faced more strains in their cash flows due to slowing sales and rising costs, such as in the property sector.
“While some property companies have degeared over time, those that have not will need to bear the brunt of higher interest servicing costs alongside a margin squeeze.
“However, not all cyclical sectors have been equally affected since some sectors such as electrical and electronics (E&E) are expected to remain robust owing to the trough and expected rebound in North Asian trade,” he said.
Malaysia has a well-regulated banking system, alongside a deep and large bond market, he said, adding that this creates a symbiotic financing system where both avenues of financing are supportive of each other.
Choy said, among others, banks have taken a prudent approach and eased lending activity, with business loans only growing 1.6% in September 2023, compared to almost 5% a year ago.
“The slack in business loans growth may have been taken up partly by the bond market, which accelerated to 5% in September this year against 4% a year ago,” he said.
UCSI University Malaysia assistant professor of finance Liew Chee Yoong
UCSI University Malaysia assistant professor of finance Liew Chee Yoong said besides stability in NPLs going into 2024, he said Budget 2024 also supports gradual fiscal consolidation, implying a moderate decrease in public debt over the medium term.
This strategy could positively influence the corporate debt landscape by stabilising the economy and reducing the risk of debt defaults, he said.
Therefore, the scenario of high bankruptcy risk as predicted for Singaporean corporations is unlikely to occur in Malaysia for 2024, said Liew, who is also a research fellow at the Centre for Market Education (CME).
However, he said if a severe external shock occurs, for example, if the war in the Middle East becomes a wider regional war, then, it would be a different story.
He said if the Middle East crisis escalates to become a wider regional war, there is a high likelihood that global oil prices would surge drastically similar to what occurred in 1973.
Since Malaysia is a net oil importer, this will have severe repercussions on inflation in the country if oil prices surge drastically. Inflation will skyrocket if this occurs as higher oil prices will have a chain effect on other business costs.
“High inflation increases costs in doing business, which lead to higher prices for consumers. This makes it difficult for businesses to compete and lead to lower profits and higher corporate financial distress and bankruptcy risks.
“Specific sectors in Malaysia that might face bankruptcy risks and restructuring challenges include those heavily dependent upon international markets and sensitive to interest rate fluctuations, such as export-oriented industries,” he said.
Liew cautions that while Malaysia seems positioned to handle current economic challenges better than some of its regional counterparts, the global economic landscape remains dynamic and uncertain.
Factors like global market conditions, trade relationships, and domestic policy effectiveness would continue to play crucial roles in shaping the country’s economic trajectory as well as determining the level of corporate bankruptcy risks, he said.
Bank Muamalat chief economist Mohd Afzanizam Abdul Rashid
Agreeing with his economic colleagues, Bank Muamalat chief economist Mohd Afzanizam Abdul Rashid said bankruptcy risks are quite remote judging from the recent statistics released by Bank Negara.
He said for the first half of the year, interest coverage ratio and debt-to-equity ratio among businesses stood at 5.5 times (against 6.5 times in the fourth quarter of 2022 (4Q22) ) and 20.6% (4Q2022: 22.5%) respectively in the first half of 2022.
He said this would mean the level of indebtedness among the corporates are still decent and should be able to maintain steady repayment capacity for their debt obligation.
“Overall, risks of bankruptcies are quite low as banks have been prudent in their credit underwriting standards.
“However, the persistent high interest rate environment along with elevated operating cost and disruptive technologies as well as climate risks are some of the key factors that will shape businesses ability to service their debt repayments.
“Therefore, we expect banks will continue to remain cautious in their financing activities going into 2024,” Afzanizam noted.
Centre for Market Education CEO Carmelo Ferlito
Meanwhile, economist and CME CEO Carmelo Ferlito attributed the growing bankruptcy risk to monetary and fiscal expansion.
Such monetary expansion created inflation and artificial expansion, resulting in the generation of more expansion and the need for higher interest rates, he said, noting that this in turn sparks bankruptcies.
“As suggested by most macroeconomics textbooks, Bank Negara adopted an expansive fiscal policy in an attempt to limit the damages from stay-at-home orders ( during the Covid-19 pandemic) and to help revive the economy.
“While a growing number of economists are sceptical about recognising the eventual stimulus role played by cuts in the interest rate, some of them believe that such a measure is key in generating boom and bust cycles. The first question to be posed is: are we trusting monetary policy too much?,” he asked.
Ferlito said if businesses do not expect a bright future, no matter how low the interest rate is, they simply do not invest, he noted, adding that in fact, expansive monetary policies may be at the root of economic fluctuations.