Malaysia’s sovereign rating not at risk, says Moody’s

The govt’s stock of guarantees has been increasing at a fairly rapid pace


The risk to Malaysia’s sovereign rating from contingent liabilities, including that of 1Malaysia Development Bhd (1MDB), is low as the probability of these debts crystallising is low, said Moody’s Investors Service Inc.

“We think the risks (from contingent liabilities) are actually low for Malaysia. As for 1MDB, we think the debt consolidation plan has proceeded as normal. We don’t have a rating on 1MDB. What we do look at is the stock of guaranteed debt and the implications that would (be imposed) for the sovereign (rat ing),” Moody’s assistant VP and analyst for sovereign risk Anushka Shah told reporters at a media roundtable in Kuala Lumpur yesterday.

1MDB now has one outstanding bond worth some RM5.3 billion (roughly US$2 billion) guaranteed by the Malaysian government, and a second bond with a letter of support from the government worth about US$1.75 billion (RM6.86 billion).

She said when providing a credit rating on any country, the international rating firm takes into consideration the risk of contingent liabilities on government debt.

She noted that the government provides “letters of some sort of guarantees” to some of the government-linked companies, and that stock of guarantees has been increasing at a fairly rapid pace.

“We find the Malaysian government has adopted quite a rigorous selective process when granting (these guarantees), so they’re granted to relatively healthy companies with strong balance sheets. Therefore, the probability of debt crystallisation is quite low at this point,” Anushka added.

She, however, noted that Malaysia’s stock of liabilities has been growing and now amounts to about 16.6% of gross domestic product (GDP), and judging from past trends, it could increase in the future.

Last December, Moody’s affirmed its A3 rating on Malaysia, with a ‘Stable’ outlook for the country.

S&P Global Ratings Inc in June 2018 also affirmed its Along- term foreign currency sovereign rating on Malaysia, but warned that political instability related to the corruption allegations could challenge the rating in the near to medium term.

On government debt, Anushka said Malaysia’s debtto- GDP ratio is relatively high at 51% compared to other A-rated sovereign countries, which have ratios of about 41%.

Yet, about 97% of the debt is funded in local currency, thus acting as a mitigating factor in the event of a currency or interest- rate shock.

Malaysia’s maturing debt reserves are larger than the stock of reserves because of certain peculiarities. Debt obligations each year are larger than the stock of reserves, Anushka said.

This, however, is buffered by the country’s foreign reserves, which have crossed the RM100 billion mark.

On whether the upcoming general election could affect Malaysia’s rating, Anushka said it will depend on whether the elected government alters the existing fiscal policies.

“We see domestic politics as a low source of event risk vulnerability to sovereign fundamentals because through electoral cycles in the past, we see that the government has maintained its fiscal deficit reduction path and, in general, has been committed to a broader reform agenda, irrespective of what’s happening on the political front.”

The key downside risks for Malaysia are a slowdown in growth, continued rapid increase in government debt, along with external economic and geopolitical factors, like trade protect ionism and unprecedented US interest-rate hikes, which could lead to a rating review.

On the oil and gas front, Moody’s VP and senior credit officer Vikas Halan expects consolidation to take place mainly among oilfield services companies, whose overall credit metrics will stay weak, while upstream companies remain healthy.

Oil prices will remain largely range-bound at US$45 to US$65 per barrel, he said, while demand will grow, but the sector at large will adapt to a lower carbon world.