KUALA LUMPUR, May 6, 2015:

With oil prices rising again globally, Malaysian government officials are relieved over recent market moves – which they say show the worst may be over.

“The Malaysian economy has withstood these challenging times,” central bank governor Tan Sri Zeti Akhtar Aziz told a conference on April 23.

Tan Sri Azman Mokhtar, managing director of state fund Khazanah Nasional Bhd, pointed to the government’s success in raising US$1.5 billion (RM5.4 billion) from the Islamic bond market in an April 16 auction and declared: “The market has spoken.”

Malaysia’s petrodollar earnings, which account for 13% of total exports and 30% of government revenue, are getting a lift from a 40% rally in the price of crude since mid-January.

Its foreign exchange reserves rose by US$500 million in the first two weeks of April, the first gain in six months and a respite after a drop of nearly US$30 billion since August.

The ringgit in April rose more than 4% against the dollar, its biggest monthly rise since January 2012.

Some economists warn of more turmoil ahead, however, with the oil price still down more than 40% since last June.

“We haven’t seen the full impact of the oil-price decline on the trade balance,” said economist Michael Wan at Credit Suisse.

The Swiss bank forecasts that Malaysia’s current account could tip towards a deficit in the second and third quarters.

Prices for natural gas – the source of most of Malaysia’s energy export earnings – typically lag oil by three to six months.

The decline in export earnings leaves it vulnerable after foreign investors had loaded up on Malaysia debt, drawn by the country’s past record of political stability and steady growth.

The first interest rate rise since 2006 by the US Federal Reserve, expected as early as next month, could spur a bigger exit from Malaysia and other emerging markets.

Foreign debt has soared to about 70% of Malaysia’s gross domestic product from less than 50% prior to 2008. That compares with about 38% in Thailand, 33% in Indonesia and 21% in the Philippines.

Malaysia has almost as much foreign debt to repay in the next 12 months as it holds in foreign reserves.

No one expects a spate of defaults. Even if the current account were to tip into deficit, years of surpluses mean that it would take time for Malaysia to cease being a net creditor, with more foreign assets than liabilities.

And because most of its debt to foreigners is denominated in ringgit, Malaysian borrowers aren’t directly exposed to exchange-rate risk, meaning their repayments will not spike in ringgit terms if the currency slides, as occurred across Southeast Asia during the crisis of the late 1990s.

A key concern, however, is that capital flight could spook the authorities into hiking rates to support the country’s shaky finances.

The central bank has so far shown no interest in raising rates, with inflation tame and a weak currency supporting exports.

But a change of heart would hurt heavily indebted households and dampen growth prospects for Malaysia, which is set to be one of Southeast Asia’s slowest-growing economies this year at 4.8%, according to the IMF.

Political risks have also mounted, as Prime Minister Datuk Seri Najib Razak faces fierce attacks from both inside and outside the long-ruling governing coalition and doubts persist over management of the economy after news of trouble at 1MDB, a government fund.

“The decline in foreign holders of ringgit debt since the peak in August 2014 is comparable to the global financial crisis when everyone was clearing the decks,” said Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch.

During the 2009 crisis, he said, Malaysia was rescued by US and Chinese stimulus policies, but things are different now: “It’s hard to see where the cavalry’s coming from.”

Fitch’s Colquhoun, acknowledging that his agency may cut its rating on Malaysia, highlights the mounting risks even as he takes care not to overstate them.

“It doesn’t mean we think the place is a basket case. It just means we think it’s riskier than it was.”

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