Saturday, December 9

RAM expects domestic economy to expand 5.1 per cent in 2014


KUCHING: RAM Ratings (RAM) expects the domestic economy to expand 5.1 per cent in 2014 despite the headwinds in the wake of the US Federal Reserve’s quantitative-easing (QE) programme and the constraint on household spending brought on by cost hikes.

This will be anchored by resilient domestic demand and rebound in exports, on the back of a more convincing recovery momentum of developed economies, RAM said.

At RAM Ratings’ recent investor briefing held in Kuala Lumpur, its analytical experts shared their outlook on the Malaysian economy and the banking as well as property sectors, along with the credit trends in our rated portfolio.

Other topics of discussion included the oil and gas (O&G) support-services sector and the toll-roads sector.

“Against a stable economic backdrop, we expect the credit quality of our rated portfolio to remain largely stable. Defaults are likely to stay benign,” it said.

Despite the QE-induced spike in yields, and based on the pipeline of rated bonds, RAM believes that the domestic market will welcome about RM90 billion-RM95 billion of bond issues in 2014.

It further added that solid capitalisation and sound provision coverage augur well for Malaysian banks’ credit standing this year, as the sector is envisaged to experience some decline in asset quality while loan growth moderates.

“Heightened inflation, property price corrections and possible interest-rate hikes could exert pressure on the quality of our much-discussed household loans.

“That said, we do not expect any system-wide deterioration as a stable employment market mitigates this risk,” it stated.

Regarding the slew of cooling measures announced under Budget 2014, RAM expects this to pose fresh challenges to property developers.

“We expect property sales to soften, notably in 1H 2014, as homebuilders and buyers adopt a wait-and-see approach. However, we expect sales to pick up in the second half as genuine purchasers and first-home buyers lock in purchases ahead of the implementation of the goods and services tax (GST) in April 2015, when further price hikes are widely anticipated,” it said.

All in all, RAM expects a single-digit slip in transaction volume but it does not foresee widespread price corrections. Major property developers will also benefit from strong unbilled sales chalked up during the last one to two years.

“Despite the still-respectable occupancy and rental rates in 2013, we expect oversupply to cloud the outlook on the commercial property market in Kuala Lumpur and Selangor in the medium term,” it added.

Meanwhile, RAM reiterated its positive outlook on the O&G support-services sector, which benefits from Petroliam Nasional Bhd’s (Petronas) sizeable capex commitments.

Notably, Petronas and its PSC partners awarded multi-billion-ringgit service contracts in 2013, which propelled the outstanding order books of major O&G support service providers to record highs; more contracts are in the pipeline.

“Even so, increasing financial leverage and heightened execution risk pose downside challenges to the credit profiles of some players.

“Emerging trends include the debut of new players and the proliferation of mergers and acquisitions (M&As), some of which are debt-funded,” RAM pointed out.

Last but not least, RAM shared its views on the implications of the Government’s recent decision to defer toll-rate hikes for 14 highway concessionaires.

As the toll operators will be compensated, RAM believes that the sanctity of the contracts has been upheld by the Government, thereby reaffirming our stable outlook on this sector.

“That said, toll-rate increases and ballooning compensation payments will be recurring issues, the resolution of which may entail more restructuring. We derive comfort from the knowledge that past restructuring has mostly been credit neutral.

“Our experience shows that traffic volume, as opposed to rate hikes, is the key driver of toll concessionaires’ credit profiles,” it concluded.