S&P Global Ratings maintains ‘Stable’ outlook on Malaysia


S&P Global Ratings is maintaining its ‘Stable’ outlook and positive credit rating of A- on Malaysia as it sees the country being continuously supported by its fundamentals amid geopolitical, trade and fiscal concerns.

Its Sovereign and International Public Finance Ratings senior director (Asia Pacific) Tan Kim Eng said concerns over political uncertainty since the 14th General Election (GE14) have been “assuaged to a great extent”, although the issue of upcoming leadership change could still create concerns for some investors.

“On the whole, people have come to believe that this government is here to stay and is relatively stable.

“Our main concern is political stability, but at this point in time, we don’t think it is big enough to change the outlook on the rating,” he told a press conference on Asean credit issues in Kuala Lumpur yesterday.

He noted that despite having reviewed several infrastructure projects that have resulted in cancellations or delays, the current administration remains open to investments from foreign investors.

“We continue to believe that growth is likely to be relatively well supported and investments will pick up again after a period of slowdown, as people have adopted the wait- and-see approach towards the new political settings.

“As long as the policy environment remains stable, we believe that investment in one way or another will continue, consumer confidence will be maintained and growth should remain relatively robust.

“Given the government’s focus on maintaining its budgetary prudence, we don’t believe that the fiscal position will deteriorate although there is quite a lot of spending to come as a result of electoral promises,” Tan added.

The government’s debt and liabilities of RM1.09 trillion (or 80.3% of GDP) are not expected to affect the country’s credit rating as these debts may not need to be settled by the administration, despite being classified as government debt.

The rating firm believes that a large portion of the debts, which the government considers itself as being responsible, remains contingent liabilities.

“Although the debts could require budgetary support for repayment, it is also possible, through policy changes, for the government to shoulder a much smaller burden than what is implied by the total debt size. So, we don’t count it in the total debt burden of the government.

“Even if we do, I don’t think it would result in a rating change today. What’s more important to us is the trajectory of the fiscal balance going forward,” he said.

According to Finance Minister Lim Guan Eng, the Malaysian government’s debt and liabilities as at end-2017 comprised RM686.8 billion of federal government debt; RM199.1 billion in government guarantees including RM38 billion worth of debt owed by 1Malaysia Development Bhd; and RM201.4 billion in lease payments for public-private projects.

On the looming US-China trade war, S&P Global economist (Asia Pacific) Vincent Conti said the impact on South-East Asia, including Malaysia, would be through second- round effects on confidence.

He said Malaysia’s main growth driver is in the strength of its domestic economy, particularly consumption, which remains “strong and robust”, while trade is “just a secondary engine of growth”.

“Within the trade war context, the direct impact is there, but minimal. Confidence is the key in how it would, in the short term, deter both domestic and foreign investors within South-East Asia,” he said.

Positives could arise in the longer term, should supply chains react to new global trade relationships by moving production from China to certain parts of South-East Asia, if the capacity is available.

“However, the current supply chain structures are just not there yet. So, in the next few years, it’s going to be negative for confidence,” Conti said.

Bertrand Jaboule, S&P Global Corporate Ratings director (Asia Pacific), believes that the current price of Brent crude oil at above US$80 (RM331.11) per barrel is not sustainable, although this has spurred the rating firm to revise its average price objective to US$70 from US$65 previously.

“We’re still cautious on the sustainability of this high oil price environment because the key issue is the breakeven production cost globally. There are a number of shale oil producers in the US that have worked over the past three years to decrease their breakeven cost.

“So, I think what’s at stake is not a demand issue. It’s a matter of supply in which capacity will come back to the market when oil prices are going up,” Jabouley said.

Brent crude oil prices rose to a four-year high of US$83 yesterday, with US sanctions against Iran, the third-biggest member of OPEC, scheduled
to start next month.

Jabouley, who expects oil prices to dip to US$65 in 2019 and US$60 in 2020, also said the oil futures’ curves are still looking downward.

“Even traders and oil professionals are a bit sceptical of the ability of oil prices to hold firm,” he added.