KUALA LUMPUR (Aug 10): Morgan Stanley Research said there are pockets of risks in the rise of foreign currency debt and foreign ownership of local government bonds in emerging markets (EMs) including Malaysia.

In a note today, the research firm said Malaysia, Chile, Brazil, Turkey and Mexico are facing risks amid rising foreign currency debt, while countries like South Africa, Colombia and Indonesia are seeing higher foreign ownership of government bonds.

"Similarly, in Malaysia, foreign ownership of local government bonds is high but the exposure has been declining in GDP terms," it said.

It added that a sudden exit of foreign bondholders could create some volatility in the foreign exchange (forex) rates, but noted that some of the smaller and more open economies have a natural currency hedge via their exports exposure.

Morgan Stanley said EM forex reserves coverage has improved since 2013, adding that forex reserve buffers are high compared to short-term external debt, with the exception of Malaysia and Turkey, which have ratios of below 100%.

"However, in the majority of EMXC (emerging markets ex-China) economies, forex reserves are lower than total foreign currency-denominated debt. Hence, even with forex reserve coverage better than in 2013, this is a risk to watch," it said.

Meanwhile, out of the 20 countries it looked at, Morgan Stanley said Malaysia, China, Chile, Thailand, South Korea, Poland and Taiwan recorded above-average current non-financial debt to GDP ratios.

"In a cross-country comparison, overall debt ratios in those countries — with the exception of Chile — also seem elevated relative to levels of GDP per capita.

"The Asian economies which have seen an increase in debt/GDP above the group's median are the ones which had suffered from PPI deflation during 2H2012 to 1H2016 as weakness in exports hit their manufacturing sector's capacity utilisation and corporate sector's pricing power," it said.

The research firm highlighted that some of the Asian economies have seen the largest rise in household debt among the 20 EM countries under its coverage, pointing out that Malaysia, Thailand, China and Korea have seen household debt increase by 20ppts since the global financial crisis.

In terms of government debt, South Africa and Mexico have seen the highest increase of more than 20ppts of GDP, followed by Hungary, Chile, Malaysia, Korea and Brazil.

"In most of these countries, government debt is relatively moderate by international standards, i.e. below 60% of GDP, with the notable exception of Brazil and Hungary.

"EMXC fiscal balances have generally started to stabilise at the end of 2015, following a major deterioration since 2011, and improved somewhat during the past year.

"However, more progress on fiscal consolidation will be needed, particularly in Brazil and South Africa, where fiscal deficits remain large," said Morgan Stanley.