S&P outlook upgrade has no major impact on ringgit, forex


MAYBANK IBG Research believes that the outlook upgrade by S&P would not have a major impact on ringgit bonds or foreign exchange (forex).

“Sentiment in the local bond market is still dominated by global inflation and rate drivers. We maintain a mildly bullish outlook on MGS,” it said in a note.

S&P Global Ratings has revised Malaysia’s outlook rating from “Negative” to “Stable” — following the country’s two-year negative view since the pandemic hit.

According to S&P, the main factors of the review increase include — strong economic recovery from the Covid-19 recession, expectations of better medium-term growth prospects than other sovereign governments at similar income levels and the continuation of a strong external position and monetary policy flexibility — which offsets weakness in higher indebtedness and weak fiscal performance.

S&P argues that political commitment to resume fiscal consolidation is strong in policymaking when the government reaches a compromise with the Opposition while recognising that the political landscape remains unchanged.

However, the possibility of an increase in the outlook may be driven by the S&P’s review to increase the profile of the Malaysian economy to a higher score than pre-Covid.

Previously, S&P rated the economy score for Malaysia with “4” — based on an initial assessment using GDP per capita, but now S&P rated a score of “3” due to the “growth trend of real GDP per capita above the government median in the same rating category”.

Maybank IBG Research also stated that Malaysia’s downward rating sensitivity will be more affected by S&P’s assessment of growth prospects and the effectiveness of policymaking, which both can be subjective.

While the instinctive lift on sentiment following the removal of the risk of rating downgrades with all three rating agencies (Fitch BBB+, Moody’s A3 and S&P A-); it now brings stable prospects in Malaysia.

“We believe the higher economic score has lifted the overall institutional and economic profile of Malaysia in the rating matrix, allowing a greater debt headroom for the same A- rating.

This is expected to reduce Malaysia’s rating sensitivity to government indebtedness and fiscal performance going forward, and probably explains why both “net indebtedness” and “change in net general government debt” no longer feature as key downside triggers,” it said.

According to Maybank IBG Research, a net debt ratio of <60% (including committed government guarantees) or interest payment-revenue ratio <10% are now the positive triggers under the upgraded institutional and economic profile.