KUALA LUMPUR: Multiple channel checks by Bank Negara Malaysia have shown that currency fluctuations in the second half of last year had limited impact on the financial system.
Ringgit depreciated 4.1 per cent on an annual basis last year and about three per cent since the start of this year.
In its Financial Stability Review, the central bank said despite movements in the ringgit, the share of foreign currency non-financial corporate debt rose only marginally above recent historical levels to 27.9 per cent of total business debt (June 2023: 27.8 per cent; 2015-2019 average: 26.6 per cent).
Most of these external debt exposures (71 per cent) have maturities of above one year, mitigating the risk that the counterparty is unwilling to rollover these loans when these loans fall due.
Furthermore, the bulk of corporates' external debt was hedged, either financially or naturally, and thus limiting foreign exchange risk arising from currency mismatches, it added.
About 22 per cent of large resident-controlled corporates' external borrowings are unhedged (equivalent to only 1.8 per cent of total business debt) and may be susceptible to exchange rate volatility.
"However, these borrowers have minimal domestic borrowings (less than 0.5 per cent of total domestic banking loans), substantially reducing credit risks to banks."
Another channel affecting businesses is via higher import prices, which could affect profitability and, subsequently, the overall debt-servicing capacity of businesses.
"This is more likely to affect businesses in the manufacturing, construction and agriculture sectors due to their higher reliance on imported materials."
As at end-2023, these sectors accounted for 11.8 per cent of total domestic banking loans.
Household foreign currency loan exposures are small at 0.4 per cent of total household loans in the banking system.
Thus, the overall household indebtedness and debt-servicing capacity are not directly affected by a weaker ringgit.
The aggregate impact from higher costs affecting households and businesses on banks' asset quality is expected to be manageable given the low level of impairments (gross impaired loan ratio, December 2023: 1.6 per cent; June 2023: 1.7 per cent).
This is supported by favourable labour market developments and an improving economic outlook.
Correspondingly, the overall share of firms-at-risk, including those more exposed to higher import prices has continued to trend lower, although it remains above the pre-Covid-19 pandemic average.
Onshore banks' external debt also remained manageable at 8.3 per cent of banking system total funding, indicating a low level of dependence on external debt to fund their ringgit operations.
Interest payments on such exposures have not been significant, with banks' interest expense on foreign currency external debt making up only about 4.6 per cent of their overall interest expense.
On excessive weakening of the exchange rate weighing on investor confidence and sentiments in the domestic financial markets, Bank Negara said Malaysia's sovereign credit rating and outlook remained stable.
Government bonds are mostly denominated in ringgit, with foreign currency government bonds accounting for less than three per cent of outstanding government bonds, limiting foreign exchange risk.
Malaysia's external position was also strong, supported by adequate foreign currency reserves and continued current account surplus, said the central bank.