Fitch’s downgrade a wake-up call

Hard steps must be taken now, or we will seriously risk losing out to our regional neighbours, says expert

by FARA AISYAH / pic by TMR FILE

THE downgrade on Malaysia’s long-term foreign-currency issuer default rating (IDR) to BBB+ from A- by Fitch Ratings Inc serves as a reminder on the country’s high fiscal deficit.

Sunway University Business School economist Prof Dr Yeah Kim Leng said the downgrade came as a surprise as the decision is seen to be a bit early as the economic and credit fundamentals of most countries — including the AA- cohort that Malaysia is benchmarked with — are still evolving in the middle of a global pandemic crisis.

“The downgrade is a reminder to the government that it needs to rein in the high fiscal deficit and debt levels, and not over-loosen its purse strings.

“Given the low interest environment and liquidity-flushed global economy and financial markets, the negative impact of the sovereign rating downgrade is more muted,” he told The Malaysian Reserve.

He said the other two international rating agencies, including S&P Global Ratings and Moody’s Investors Service, have not changed their ratings on Malaysia’s sovereign credit rating.

As such, Yeah said the split rating situation is not as damaging to the country so far, as access to global financial markets and external borrowing costs are concerned. Institute for Democracy and Economic Affairs CEO Tricia Yeoh said Prime Minister Tan Sri Muhyiddin Yassin and his administration must realise that the downgrade is a wake-up call and they need to take steps now to address the country’s deteriorating governance standards.

“Hard steps must be taken now, or we will seriously risk losing out to our regional neighbours, many of whom have over the last decade already implemented reform measures to improve their governance.

“The institutional governance of a country’s economic environment is, therefore, imperative to the international investing community,” she said in a statement last week.

She urges the government to take the opportunity to demonstrate strong leadership by making reform policies a priority and also a reality as the country positions itself for a potential rebound in 2021.

Yeoh said governance and structural reforms will present the Malaysian economy with new growth opportunities, especially following the signing of the Regional Comprehensive Economic Partnership and the possibility of ratifying the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

Last Friday, Fitch downgraded its rating on Malaysia’s IDR as it expects the fiscal deficit to remain higher than pre-pandemic levels, given a continuation of support measures and political pressure for higher spending.

The rating agency said Malaysia’s government debt metrics have deteriorated due to the pandemic as it expects general government debt to jump to 76% of GDP in 2020 from 65.2% of GDP in 2019.

“The debt figures used by Fitch include officially reported ‘committed government guarantees’ on loans, which are serviced by the government budget, and 1Malaysia Development Bhd’s net debt, equivalent to 12.6% in September 2020 and 1.3% of GDP respectively.

“On this basis, the debt burden is significantly higher than the medians of 59.2% and 52.7% for the A and BBB rating categories respectively,” Fitch said in a statement.

It added that Malaysia’s debt is close to 400% of revenue, around three times the peer median.

Meanwhile, Senator Liew Chin Tong said although Fitch believes the budget deficit targets of 6% in 2020 and 5.4% in 2021 are realistic, it decided to issue a downgrade regardless.

“The announced budget is too timid to ensure a strong recovery, and due to the downgrade, our borrowing costs will go up regardless, constraining our ability to invest in the economy and create greater prosperity for all Malaysians.

“It was clear all along that this budget cycle would require unconventional thinking, given the high economic cost of the pandemic,” he said in a statement last week.

He added that the budget should have focused solely on doing what is right for Malaysia’s economy, instead of trying to abide by the opaque and arbitrary rules of the rating agencies.