Malaysia may see more negative rating adjustments

Impact from Fitch’s downgrade of Malaysia’s sovereign ratings seen as temporary, say analysts


FITCH Ratings Inc’s downgrade of Malaysia’s sovereign ratings is an indication that other international agencies may cut their outlook as well.

The credit rating agency downgraded Malaysia from A- to BBB+ last week, signalling that other agencies may be taking a critical look at the country’s long-term credit issuer default rating.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid told The Malaysian Reserve that downgrades from other raters like Moody’s Investors Service and S&P Global Ratings are on the cards, even though the way they assess a country may differ.

“If you look at S&P, they have revised their rating outlook from ‘Stable’ to ‘Negative’ in June. Nonetheless, their assessment might differ from Fitch.

“So, it’s not necessarily parallel, but the risks of the downgrade are quite visible at this juncture,” he said.

He said there would be a negative impact on the ringgit and bonds if international funds move their assets out of the country on credit rating downgrade to defend their portfolios.

However, he said these funds do not rely entirely on rating agencies to form credit opinion on the Malaysian government.

Mohd Afzanizam said Fitch’s BBB+ is still investment grade territory and there is also a case for funds to remain.

Fitch said last week it downgraded Malaysia on the impact of Covid-19 on the economy and expectation that the country’s fiscal deficit would remain higher than pre-pandemic levels.

The agency said it sees general government debt to rise to 76% of GDP this year from 65.2% in 2019.

In a note yesterday, MIDF Research said Malaysia is not alone in receiving a downgrade as even countries with stronger credits, like the UK and Hong Kong, also suffered amid fallout from the global health crisis.

Earlier this year, Fitch downgraded the sovereign ratings of the UK and Hong Kong to AA- from AA.

MIDF Research said the rating actions had no long-term effect on currencies or equities.

“Based on our observations, countries’ currencies seem to continue appreciating against the US dollar this year despite the rating downgrades.

“This seems to suggest the possibility for the ringgit to return to its appreciating trend prior to the downgrade,” it said.

A “knee-jerk” negative reaction is expected from the downgrade, but the overall upward trajectory of the market remains intact, it said.

The direct impact will also be mainly on the government’s cost of borrowing. The lower rating may lead to higher long-term borrowing cost as the firm takes into account higher risks from the weaker fiscal dynamic, such as the higher fiscal deficit, debt-to-GDP ratio and political uncertainty.

“Despite the higher cost of borrowing, we expect the government will continue to increase borrowing next year to finance its fiscal deficit.

“We still project for the government spending to provide a positive contribution to 2021 GDP growth, which will be one of the factors that will support the country’s economic growth rebounding to positives from the low base this year,” it said.

Meanwhile, RHB Research Institute Sdn Bhd expects the bond market to remain supported as bond dynamics are healthy, mainly due to continued support from onshore real money investors and still compelling real yields.

“Typically, there will be a sell-off in capital markets in both bonds and equities, given expectations that the country’s risk profile has increased.

“However, we believe any sell-off will be limited and temporary. The impact on US dollar/ringgit in the near term will be temporary. Any retracement of US dollar/ringgit to 4.10 will be short-lived,” the firm said in a note yesterday.

In response to the rating agency’s downgrade, the government expressed its disappointment as the country is in the middle of managing the economy at an unprecedented level due to the pandemic.

Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz said Fitch’s decision “does not give due justice and credit” to the country’s crisis response efforts and strong economic fundamentals.

Read our earlier report


Fitch’s downgrade a wake-up call