Negative sovereign creditworthiness outlook for Malaysia in 2020

by SHAZNI ONG / pic by BLOOMBERG

MOODY’S Investors Service Inc has stated in a report that its outlook for Asia-Pacific (APAC) sovereign creditworthiness in 2020 is negative due to slower economic growth, a turbulent external environment and some governments’ reduced capacity to respond to shocks.

A gradual slowdown in global growth, exacerbated by trade tensions between China (A1 stable) and the US (Aaa stable) — notwithstanding the Phase 1 trade deal — will constrain the credit quality of rated sovereigns in APAC.

Moody’s VP and senior credit officer Martin Petch said the prospect of China and the US agreeing on long-term issues like industrial policy, intellectual property and market access remains highly uncertain despite the Phase 1 deal.

“As a result, the US-China trade relationship will remain a source of uncertainty and volatility in 2020,” he said.

The report added that these trade frictions will spread via global supply chains, and APAC sovereigns embedded in global supply chains such as Hong Kong (Aa2 negative), Korea (Aa2 stable), Malaysia (A3 stable), Singapore (Aaa stable) and Thailand (Baa1 positive), along with Vietnam (Ba3 negative) to a degree, will be impacted as a result.

Moody’s said weakening trade is also curbing investment, which if sustained, will further reduce potential growth and amplify long-standing structural challenges including fiscal vulnerabilities and demographic change.

“In APAC, trade tensions are no longer simply exacerbating the global slowdown in trade volumes.

“The shock is now also extending to investment, with businesses putting off their expansion plans amid economic, political and policy uncertainties, which will hurt income growth, competitiveness and productivity in the long run,” Petch added.

On average across APAC, Moody’s forecasts a GDP growth of 4% in 2019-21 period, slower than 4.4% over 2014-18 period, but still robust by global standards.

The erosion of fiscal positions as governments try to buffer against external and domestic growth shocks will be a risk for some sovereigns, said Moody’s.

“For governments such as India (Baa2 negative), China, Pakistan (B3 stable) and Sri Lanka (B2 stable), slower growth prospects will increase restrictions on fiscal space, further limiting the capacity of the authorities to support their economies.

“A few, including Hong Kong, Korea and Singapore, have much more fiscal flexibility,” the rating agency added.

Weaker growth will compound structural challenges in the region, which ranges from rapid ageing to creating enough jobs for large and growing young populations in places like the Philippines (Baa2 stable), Indonesia (Baa2 stable) and Malaysia.

“Amid heightened unpredictability, APAC’s frontier markets are vulnerable to any sudden shift in investor appetite,” it said.

Meanwhile, Kenanga Investment Bank Bhd (Kenanga Research) in a note yesterday said the local debt market is expected to continue experiencing a net inflow in 2020 as a search-for-yield behaviour dominates.

“Inflows to sustain particularly in the first half amid a low interest-rate environment brought about by the global accommodative monetary stance and a risk-on mode following the US-China trade truce.

“These might lift the ringgit near to four against the US dollar support level, before settling at 4.1 by end-2020,” the research firm said.

Kenanga Research added that it has a cautious growth outlook retained, in spite of ease in trade tension, as uncertainties from the external front persist, in particular with regards to global trade momentum and rising geopolitical tensions.

“Coupled with further weakness in domestic activities, we reckon that Bank Negara Malaysia may decide to slash the Overnight Policy Rate by 25 basis points to 2.75% as soon as early first quarter,” it said.