Rating agency values transparency but fiscal strength required in assessment


Rating agency values transparency in a government, but higher debt and reliance on oil also play a big part in its credit risk assessment.

Moody’s Investor Service Inc told The Malaysian Reserve in an email reply that greater transparency in the public accounts and a focus on inclusive growth will be credit positive if sustained.

However, in the near term, the fiscal deficit and heightened reliance on volatile oil related revenue weakens Malaysia’s fiscal profile.

In addition, fiscal strength is the third factor Moody’s is looking at in its assessment of a sovereign credit risk.

“Fiscal strength captures the overall health of government finances. The starting point of our analysis is to assess relative debt burdens (debt/GDP, debt/revenues) and debt affordability (interest payments relative to revenue and GDP).

“From there, we take into account the structure of government debt. Some governments have a greater ability to carry a higher debt burden at affordable rates than others,” the rating agency said.

Moody’s said this in response to TMR’s query on the rating agency’s methodology in rating a country — whether it looks at the positive facts and figures reported or prioritises a more transparent government.

In terms of Malaysia’s A3 ‘Stable’ credit profile, Moody’s said it is supported by its large and diversified economy, ample natural resources and strong medium-term growth prospects.

“A 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.

The other key factors Moody’s is looking at in its assessment of sovereign credit risk include economic strength, institutional strength and susceptibility to event risk.

However, downward rating pressure could come from a significant worsening in Malaysia’s debt dynamics — possibly arising from slower fiscal consolidation or the crystallisation of contingent liabilities; a deterioration in the balance of payments position or material capital flight which puts further pressure on reserves; and a long lasting negative shock to the economy, possibly amplified by high household debt levels.

Moody’s said more than a third of sovereign defaults have occurred as a result of persistent external and fiscal imbalances which have, over time, built up an unsustainably high-debt burden.

The defaults of Pakistan in 1998, Moldova in 2002, Dominica in 2003, Grenada in 2004, Belize in 2006, the Seychelles in 2008, Jamaica in 2010, and most recently, Greece in 2012 and Jamaica in 2013 are all examples of fiscal and external imbalances building up over time that eventually lead to large debt burdens, which in turn create significant exposures to further shocks.

The rating agency said its debt sustainability analysis involves anticipating future trends and events based on available information.

Its assessment is informed by current measures and recent trends, including in relation to the sovereign’s debt burden, fiscal policy and the GDP growth rate.

The analysis may consider a range of future scenarios with respect to nominal growth, fiscal trajectories, interest-rate developments, and other risk factors that could cause meaningful variations in future credit strength.

Moody’s also takes into account both contingent liabilities and financial assets.

On Petroliam Nasional Bhd’s (Petronas) revised outlook from ‘Stable’ to ‘Negative’, Moody’s senior VP Vikas Halan said the negative outlook on Petronas’ ratings reflects the agency’s view that the financial profile of the oil and gas (O&G) company may deteriorate if the government continues to ask the company to keep dividend payments high, especially should oil prices decline.

“Such a situation would no longer support a rating level for the company that is currently two notches above that of the sovereign.

“In such a scenario, Petronas’ ratings could be constrained to no more than one notch above that of the sovereign,” he said in a statement.

The rating action follows the recent Malaysian Budget 2019 announcement that Petronas will pay RM30 billion as a oneoff special dividend to the government of Malaysia in 2019, in addition to the regular annual dividend, which in 2019 will total RM24 billion.

The company will also pay RM26 billion in dividends in 2018 versus an annual dividend payments of RM16 billion in 2016 and 2017.

Moody’s added that although Petronas can support the dividend payments announced in the budget and still maintain a net cash position, a further increase in regular dividend payments cannot be ruled out, especially if there is an increase in government’s funding needs.

High shareholder returns will reduce the company’s ability to absorb the volatility in crude oil prices and constrain its financial flexibility.

Nonetheless, Moody’s expects Petronas to continue to invest in the growth of its production and reserves.

“Furthermore, changes to the Malaysian government’s policies for the O&G sector could affect Petronas’ position as the sole owner of the country’s petroleum resources, and increase the royalties paid on its upstream O&G production,” Halan said.

“These changes could put pressure on the company’s ratings, especially if Petronas is required to continue paying high dividend payments.”

Moody’s said an upgrade of the A1 ratings is unlikely, given the ‘Negative’ outlook.

However, the negative outlook on the ratings could be revised to ‘Stable’ if there is reduced uncertainty around company’s dividend policy and further clarity of the government’s policy for the O&G sector both of which lead the agency to conclude that the company will retain its existing financial flexibility and credit profile.