by SHAZNI ONG/ pic by BLOOMBERG
MOODY’S Investors Service Inc has retained its A3 ‘Stable’ rating on the Malaysian government, supported by the country’s large, diversified and competitive economy.
The rating agency stated that the rating is also attributable to Malaysia’s strong medium-term growth prospects compared to similarly rated peers and ample natural resources.
“Institutions have also demonstrated effectiveness in macroeconomic policymaking and financial supervision,” it said in a recent report.
“Although government debt is moderately high, the debt structure is favourable and the government has access to a large pool of domestic savings.
“We expect real GDP growth to remain at the lower end of its 2014-2018 range, averaging 4.5% over the next two years because of weaker global growth, but remain higher than peers,” Moody’s stated in a report last Thursday.
Balanced against these credit strengths, Moody’s noted, are the government’s narrow revenue base that limits fiscal flexibility, challenges to further fiscal consolidation, and institutional weaknesses in control of corruption and governance.
The firm said external vulnerability drives Malaysia’s susceptibility to event risks because of size-able external debt repayments relative to foreign-exchange reserves.
“We expect the government’s fiscal deficit to average to 3.3% of GDP over 2020-2021, as slower growth compared to the past decade, the abolition of the Goods and Services Tax that has narrowed the revenue base, and ongoing social spending need to continue to weigh on government’s efforts to further reduce deficits,” it added.
Nonetheless, Moody’s said the stable outlook indicate risks to Malaysia’s rating are balanced, with the rating could be upgraded if prospects for fiscal consolidation were to improve significantly.
This includes particularly measures that broadened the currently narrow revenue base, and pointing to a sustained decline in the government debt burden and improvement in debt affordability.
The rating firm cautioned the rating could be downgraded if government debt was to increase markedly over the next few years, whether through wider currently assumed fiscal deficits or significant financial support to state-owned enterprises over a number of years.
Rising political tensions and divergences of views within the government that undermined policy effectiveness and threatened the stability of capital flows could also lead to a rating downgrade, it added.
Moody’s latest rating report on the government comes after just a few weeks where the firm noted 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.
In a previous report, Moody’s said a gradual slowdown in global growth, exacerbated by trade tensions between China and the US — 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 (picture), stated that 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 trade deal.