Fitch affirms Malaysia’s rating at A- with stable outlook

The key rating drivers for the country is its strong and broad-based medium-term growth with a diversified export base


FITCH Ratings Inc has affirmed Malaysia’s long-term foreign currency issuer default rating at ‘A-’ with a stable outlook, but warned a weak fiscal position relative to peers weighs on the credit profile.

In a statement yesterday, the international credit rating agency stated that key rating drivers for the country were its strong and broad-based medium-term growth with a diversified export base. However, it noted the rating drivers were held down by high public debt and some lagging structural factors such as weak governance indicators relative to peers. Fitch added the latter may gradually improve with ongoing government efforts to enhance transparency and address high-profile corruption cases.

“The government’s repeal of the Goods and Services Tax and replacement with the Sales and Service Tax has undermined fiscal consolidation.

“The government aims to offset the revenue loss through measures to strengthen compliance, the introduction of a sugar tax and an increased stamp duty.

“Its fiscal deficit target for 2019 of 3.4% of GDP, which we believe will be met, includes a special dividend from Petroliam Nasional Bhd,” the rating agency said.

Fitch said political pressures and growth headwinds could motivate the government to increase its current spending.

“If it does so, it would seek additional revenues or asset sales to contain the associated rises in the deficit and public debt,” the rating agency said.

Fitch estimates the general government debt to gradually decrease from 62.5% of GDP in 2019 to 59.3% in 2021.

The debt figures, it said, include officially reported “committed government guarantees” on loans, which are serviced by the government budget, and the 1Malaysia Development Bhd’s (1MDB) net debt, equivalent to 9.2% and 2.2% of GDP respectively as at end-2018.

“The government guaranteed another 9.2% of GDP in loans it does not service. The greater clarity provided by the government last year on contingent liabilities negatively influenced the debt ratios, but this is partly offset by the improved fiscal transparency,” it stated.

Significant asset sales, as intended by Putrajaya, could result in a swifter decline in the debt stock than forecast, it added.

Fitch expects Malaysia’s economic growth to slightly decelerate for the rest of this year on worsening external environment. It forecast growth to hit 4.4% in 2019 and 4.5% in 2020.

It stated Malaysia’s open economy is integrated into Asian supply chains and its diversified export base will help cushion the impact from a potential fall in demand in specific sectors.

“Global trade tensions are likely to have a detrimental effect on Malaysia’s economy, as with many other countries, but this may be partially offset by near-term mitigating factors, such as trade diversion, in particular, towards the electronics sector,” the rating agency said.

It expects monetary policy to remain supportive of economic activity and Bank Negara Malaysia’s move to reduce its policy rate by 25 basis points (bps) to 3% last May was deemed a preemptive response to increased external downside risk.

Inflationary pressures are limited with headline inflation remains low at 0.2% in May 2019.

“Fitch expects another 25bps rate cut in 2020 on the back of continued external and domestic uncertainty,” the rating agency said.

Fitch added Malaysia is vulnerable to shifts in external investor sentiment, partly because of still-high foreign holdings of domestic government debt, although these have fallen to 21% from 33% three years ago.

The rating firm added short-term external debt is high relative to reserves, although a significant part of this constitutes intra-group borrowing between parent and subsidiary banks domestically and abroad, reflecting the open and regional nature of Malaysia’s banking sector.

“Banking sector fundamentals remain broadly stable. Elevated, but slightly declining household debt at 83% of GDP and property-sector weakness should be manageable for the sector, but present a downside risk in case of a major economic shock,” it said.

The sector has healthy capital and liquidity buffers, as indicated by the common equity Tier 1 ratio of 13.4% and liquidity coverage ratio of 155% as at end-May 2019.

It stated reforms that institutionalise improved governance standards through stronger checks and balances, and greater transparency and accountability would strengthen Malaysia’s business environment and credit profile.


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