Malaysia’s rating dependent on fiscal measures taken, says Moody’s

The rating agency reiterates the removal of GST and  the reintroduction of fuel subsidies are credit negative


Moody’s Investors Service Inc maintained Malaysia’s 2017 debt burden forecast, but noted that the review of infrastructure projects will be key in assessing the country’s credit quality.

The rating agency said the country’s direct government debt to gross domestic product (GDP) for 2017 is estimated at 50.8%, while its assessment of contingent liability risks posed by non-financial public institutions remain unchanged.

It, however, noted that due to 
the country’s high debt burden, which acts as a credit constraint, 
fiscal measures undertaken by the current government would be essential in assessing the country’s credit rating.

“To what extent the new government achieves fiscal deficit consolidation is key in gauging the eventual effects on Malaysia’s fiscal metrics, as well as credit profile,” Moody’s reported yesterday.

Malaysia’s debt has surpassed the RM1 trillion mark. The Pakatan Harapan-led administration had proposed undertaking several initiatives to deal with the situation.

The prime minister’s (PM) recent request for a yen credit loan from Japan’s PM Shinzo Abe was one such initiative.

Several large-scale infrastructure projects in the country, such as the Kuala Lumpur-Singapore high-speed rail and the third line of the Klang Valley mass rapid transit or MRT3, have also been suspended.

The government is also looking for ways to reduce the RM55 billion cost of the East Coast Rail Link project, while at the same time, investigate further into two gas pipeline projects worth RM9.41 billion in Kedah and Sabah, which are currently entangled in controversy.

Moody’s said large infrastructure projects — that had benefitted from government guaranteed loans, as well as outstanding debt from 1Malaysia Development Bhd — will determine the risks contingent liabilities pose to Malaysia’s credit profile.

The rating agency reiterated the removal of the Goods and Services Tax (GST) and the reintroduction of fuel subsidies are credit negative for the country, which is currently assigned an A3 stable rating.

“In the absence of effective compensatory fiscal measures, (the removal of GST) is credit negative because it increases the government’s reliance on oil-related revenue and narrows the tax base,” it said.

Moody’s estimates revenue lost from the scrapped tax will measure about 1.1% of GDP this year and 1.7% beyond 2018, which will further strain the country’s fiscal strength.
The country’s GST revenue was RM44.3 billion, or 3.3% of GDP, last year.

On fuel subsidies, the rating agency said subsidies distort the market-based pricing mechanism, while potentially pressuring Malaysia’s fiscal position and balance of payments, as well as raising its exposure to oil price movements.

Moody’s said the GST removal could boost private consumption in the short term. It noted that the review of large infrastructure projects may result in any pick up in investments to be more spread out than previously anticipated.

Oanda Corp head of trading for Asia Pacific Stephen Innes said Moody’s recent report is likely to put more pressure on the ringgit.

“This is even more so for traders setting their sights on the psychological RM4 level against the US dollar,” he said.

“On a positive note, domestic growth prospects will not alter in the near term (but the market has already priced in this expectation).”

The local note is currently trading at a nearly five-month low against the greenback at RM3.99 on continued capital outflow, political risk and stronger US dollar direction