M’sia able to weather US debt storm

by **Cals** Thu 17 Oct 2013, 10:38

Business & Markets 2013

Written by Shalini Kumar of theedgemalaysia.com

Thursday, 17 October 2013 10:09

KUALA LUMPUR: Markets will follow closely whether the US government will default on its debt obligations today as the Senate negotiated last night on a deal to extend US borrowing to Feb 7.

Local market observers said Malaysia should be able to withstand any market disruptions in the short term should the US default.

According to RAM Ratings chief economist Dr Yeah Kim Leng, the global impact of a US debt default will be severe, but technically Malaysia should be able to buffer itself financially for a while.

“Malaysia will be able to insulate itself to a certain extent thanks to strong domestic demand, but the secondary impact will come through the trade and investment channels, especially with our trade exports to China,” he said in a phone interview with The Edge Financial Daily.

Yeah cautioned the fallout from the debt default could result in a global recession worse than that following the Lehman Brothers collapse in 2008. This is because countries using the US dollar as collateral will no longer find security in the greenback.

“Malaysia holds [US dollar-backed] international government securities as reserves. The impact on our market may not be so severe, but investor confidence will definitely be jeopardised.

“The real economic impact really depends on financial market confidence. If there is a large volume of selldown, interest rates will rise and affect the US government’s ability to pay back its debts,” he said.

Yeah said there is hope of US policymakers voting at the last minute in favour of raising the debt ceiling, but he does not discount the possibility of the deadline being missed by a few hours, which would automatically trigger the default alarm for the world’s economic leader.

On Tuesday, Fitch Ratings said it had placed the US’ AAA long-term foreign and local currency issuer default ratings on Rating Watch Negative. It maintained the country’s ceiling at AAA.

“Fitch continues to believe that an agreement will be reached to end the current political impasse and raise the US debt ceiling. Even if the debt limit is not raised before or shortly after Oct 17, we assume there is sufficient political will and capacity to ensure that Treasury securities will continue to be honoured in full and on time,” it said.

Eastspring Investment Bhd chief investment officer Yvonne Tan said there is unlikely to be an immediate market panic as investors still have hope the US government will make a rational decision.

“The crucial date to watch will be Nov 15. That’s when about US$30 billion (RM95 billion) in interest payments are due and it’s unlikely that the US will be able to make its reserves stretch that far. This is when the country will really go into default,” she said.

If the Democrat and Republican lawmakers do not come to a decision by today, by law, the US government will no longer be able to add to the national debt, and will have to rely on incoming revenue and US$30 billion in cash to pay back the country’s obligations.

The US$12 trillion of outstanding US government debt is 23 times the US$517 billion Lehman owed when it filed for bankruptcy on Sept 15, 2008.

The FBM KLCI ended 0.37% higher yesterday, and the ringgit appreciated 0.52% against the greenback following Fitch’s negative watch on the US.

This article first appeared in The Edge Financial Daily, on October 17, 2013.