Moody’s holds A3 ‘Stable’ rating on nation due to its large, diversified economy

It says Malaysia’s relatively high govt debt burden is balanced by a favourable debt structure and large domestic savings


Moody’s Investors Service Inc has maintained its A3 ‘Stable’ rating on the Malaysian government, stating the country’s credit profile is supported by its large and diversified economy, ample natural resources and robust medium-term growth prospects.

In a recent report, the credit rating firm said Malaysia’s relatively high government debt burden is balanced by a favourable debt structure and large domestic savings.

“Credit challenges include the implementation of further fiscal consolidation and external vulnerability as indicated by sizeable external debt repayments relative to reserves,” it said.

Apart from having a diverse economy with rapid growth rates, the country’s credit strengths include a sound financial sector and prudent regulation, and a favourable debt structure that contributes to low servicing costs.

Credit challenges also include a relatively high-debt burden and a narrow revenue base, elevated system- wide leverage and the aforementioned large external debt repayment obligations.

“In the absence of further fiscal reform, we expect only limited improvement on Malaysia’s public indebtedness and debt affordability. However, a robust growth path, which provides the base for an expansion in nominal gross domestic product, lends stability to this debt burden,” Moody’s said.

It said the country’s sovereign rating could be upgraded should there be a material convergence in government debt levels with similarly rated peers, accompanied by improvements in debt affordability and continued fiscal deficit reduction.

A reduction in external vulnerability risks — such as through a containment of the rise in short-term external debt liabilities, or through effective use of macro-prudential tools to limit volatility in capital flows durably — could also improve the country’s rating.

On the flip side, a downgrade could come from a significant worsening in Malaysia’s debt dynamics, possibly arising from a renewed fall in commodity prices or the crystallisation of contingent liabilities.

Deterioration in the balance of payments position or material capital flight — thus putting further pressure on reserves — and a long-lasting negative shock to the economy possibly amplified by high household debt levels, could also result in a downward revision.

The rating firm said the credit implications of Malaysia’s upcoming general election would be determined by the impact of election results on existing government policies, with particular regard to fiscal consolidation and debt trend.

“Although domestic political risks have increased in recent years, they have not adversely affected policy reform as the government has demonstrated commitment to its fiscal deficit reduction goals through past electoral cycles,” it stated.

It noted that the manifestos unveiled by both the ruling and Opposition coalitions include measures such as raising minimum wages, greater cash handouts, and a relief for Federal Land Development Authority settlers, among others.

“The impact of these programmes on the sovereign credit will depend on how they are funded and whether they have a negative effect by delaying government’s ongoing efforts at fiscal consolidation.

“Economically, these programmes are likely to boost consumption over the near term, but against the backdrop of Malaysia’s export-driven growth, the impact is not likely to be material and could be offset by inflation,” the rating agency cautioned.