MARC positive on Malaysia’s sovereign rating


Malaysian Rating Corp Bhd (MARC) has affirmed Malaysia’s sovereign rating position, despite the recent macro releases that pointed to a softer GDP growth in the near future.

In its report entitled “Economic Outlook 2019: Bracing for Global Speedbumps”, MARC chief economist Nor Zahidi Alias (picture)  said the real expansion came in below market consensus and provided evidence of drag from a weaker external sector.

“Real export of goods and services contracted in the third quarter of 2019 since 2016 due to natural gas supply disruption in East Malaysia, as well as the moderation in exports of some electrical and electronics sub-sectors,” he said.

He added that the unexpected boost in exports in October was a good surprise, indicating that trade diversions could ease slower exports.

“However, as it is too early to make a firm assessment with regard to overall trade performance, we continue to anticipate a moderation in Malaysia’s exports in 2019 on account of a weakening global trade; declining commodity prices; and China’s moderating economy,” he said.

According to Nor Zahidi, consumer inflation and asset prices are not expected to pose significant threats next year, although equity price valuations are expected to remain above average based on price-earnings multiples.

He said foreign net capital flows turned negative in 2018 and weakened the ringgit against the US dollar by almost 9% from its peak in April.

“The ringgit also bore the brunt of a stronger US dollar, which appreciated by 7.9% against major global currencies between April and October 2018.

“Going forward, the trend in capital flows and the path of the ringgit will largely hinge on both the prospects of the US dollar and Malaysia’s overall macroeconomic performance,” he said.

Nonetheless, on a real effective exchange rate basis, the ringgit remains attractive — trading lower than one standard deviation below its long-term mean.

Nor Zahidi said domestic demand will continue to provide some relief to the economy, with private consumption to continue supporting headline growth — in view of the relatively stable labour market evidenced by an average jobless rate of 3.3% in the first three quarters of 2018.

“Risks are adding up, falling palm oil and rubber prices from their recent peaks will likely have adverse repercussions on rural households’ spending.

“Crude palm oil prices slipped below the RM2,000 threshold level at the end of November, while rubber prices declined by 8.6% from its recent peak in October 2018,” he said.

Meanwhile, Nor Zahidi said even though MARC is positive on the sovereign rating position, it may come under pressure later.

He said the view was based on forward-looking and through-the-cycle credit assessment, while the adjustments in Malaysia’s fiscal and debt positions do not imply fiscal profligacy.

“Over the long term, however, Malaysia’s fiscal and debt performance will hinge on prudent opera- ting expenditure management and the introduction of newly sustainable income streams to replace the now abolished Goods and Services Tax,” he said.

He added that the government’s proposed institutional reforms of setting up a debt management office to review and manage the government’s debt and liabilities should help.