KUALA LUMPUR:Bank Negara Malaysia (BNM) expects business conditions to improve in the second half of the year (2H2020), in line with the gradual improvement in economic activity.

“The extension of targeted financial relief measures will continue to help support businesses alongside corporate and small and medium enterprise (SME) guarantee schemes as the recovery takes a stronger hold.

“More importantly, greater visibility on loan performance from the transition to more targeted repayment assistance remains important to reduce risk aversion and improve credit supply during the recovery phase,” it said in its Financial Stability Review - First Half 2020, released here today.

The report provides BNM’s assessment on current and potential risks to financial stability and the resilience of the Malaysian financial system to sustain its financial intermediation role in the economy.

Corporate sector external debt increased by 4.9 per cent, mainly driven by additional borrowings by firms in the oil and gas-related sector and valuation effects following the weaker ringgit during 1H2020 against selected major and regional currencies.

Nevertheless, the central bank said risks to financial stability from external borrowings remained manageable as borrowings are mostly medium to long term in nature and hedged against exposures to currency movements.

Vulnerabilities remain elevated for sectors that may see a slower recovery, particularly tourism-related sectors and high-touch service industries where border restrictions and precautionary consumer behaviour continue to weigh on business activities.

“Risks of COVID-19 infections rising again could also affect global demand. Sectors that may continue to be affected account for about 16 per cent of total banking system loans,” said the central bank.

BNM expects the banking system to remain resilient to a significant increase in overall business impairments with losses to banks substantially mitigated by collateralised obligations and diversified revenue sources among larger borrowers.

-- BERNAMA