by RUPINDER SINGH / pic AFP

FITCH Ratings has affirmed Malaysia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB+’ with a stable outlook.

It said Malaysia’s ratings balance a diversified economy with strong medium-term growth prospects, against high public debt, a low revenue base relative to the operating expenses.

It said that it expects GDP growth to moderate to 4% in 2023 and 4.8% in 2024, from an exceptional 8.7% in 2022, when the lifting of Covid-19 restrictions and government relief measures led to a rapid and broad recovery.

“In 2023, we expect services to continue to gain from resilient domestic demand, contained inflation and a recovery in tourism-related sectors from the reopening of China,” it said.

It said manufacturing and exports are likely to face headwinds from weaker global demand for electronics and commodities. The medium-term growth trend of 4%-5% remains robust, it added.

Fitch expects the general government debt to GDP ratio to decline from 2024, on strong GDP growth amid only gradual consolidation.

The ratio, it said, is expected to fall to about 73% by end-2023 from a peak of 77.6% in 2021.

“Our debt figures include ‘committed guarantees’ on loans by government-linked companies and 1Malaysia Development Bhd’s (1MDB) net debt, which in 2021 totalled 14.2% of GDP.

“The upcoming 1MDB global bond due March 2023 of US$3 billion (RM13.14 billion), or 0.7% of GDP, will be fully redeemed and financed by government domestic issuance,” it said.

Fitch said the fiscal policy plans of the newly elected government will only become clearer when the full 2023 budget is re-tabled on Feb 24, but it assumes deficit reductions will be gradual as the government is likely to avoid resorting to unpopular revenue measures.

“We expect the central government deficit to decline to an average of around 4.5% of GDP in 2023-2025,” it said. 

The main upside risks to Fitch’s projections include greater expenditure rationalisation and substantial revenue mobilisation measures, such as reintroducing a Goods and Services Tax (GST).

“We estimate that the central government deficit declined to 5.5% of GDP in 2022, from 6.4% in 2021,” it said.

Preliminary central government operations data show that revenue and expenditure rose by 29.1% and 12.1%, respectively, in 2022.

Revenue collection was boosted by a robust economic recovery and one-off sources, including an additional dividend from state oil company Petroliam Nasional Bhd (Petronas) and the Prosperity Tax.

Fitch estimates that total subsidies and assistances tripled to around 4.5% of GDP in 2022 from 1.5% of GDP in 2021 amid elevated energy and food prices.

It also noted that the general government revenue remains relatively dependent on oil production, and current expenditure, including payrolls, pensions and subsidies, is high and rigid.

“We forecast the general government revenue/GDP ratio to decline from an average of 24% of GDP in 2010-2014 to 16.7% in 2023 and 2024. The decline is exacerbated by the replacement of the GST with the narrower Sales and Services Tax in 2018,” it said.

While the government is reviewing its use of broad-based subsidies, Fitch on the other hand expects the shift to a more targeted regime to be gradual, as the government still prioritises alleviating the cost of living.

Fitch said while the selection of the new prime minister and a unity government relieves near-term political uncertainty, the coalition’s stability remains fragile, as the different political blocs in the coalition vary widely and the anti-hopping bill allows parties and blocs to collectively change their allegiance.

The unity government will be tested in six state elections scheduled in 2023, it said.

As headline inflation averaged 3.3% for 2022, Fitch expects price controls and subsidies to keep inflation low at 2.8% in 2023.

“Our inflation forecast is subject to upside risk from possible policy changes on price controls and subsidies and a renewed momentum in global commodity prices,” it said.

After raising rates by 100 basis points (bps) in 2022, Bank Negara Malaysia left the policy rate unchanged at 2.75% in January 2023 and signalled that further normalisation would balance the risks to inflation and growth outlook.

Fitch said Malaysia generated current account surpluses for more than two decades and expects it to continue to do so in the medium term.

“We forecast the current account surplus to widen to 3.2% of GDP in 2023, driven by higher services exports, from 2.6% of GDP in 2022. 

“Malaysia is well-positioned for foreign direct investment inflows, with the manufacturing sector being the largest recipient. Its strong manufacturing ecosystem will continue to attract investment in the sector, although competition is increasing from other countries in the region,” it added.

Fitch estimates the ratio of liquid external assets/liquid external liabilities at 96.3% in 2022. It noted that short-term external debt is high relative to foreign-currency reserves, but a significant part of the borrowings is stable intra-group borrowings between parent and subsidiary banks domestically and abroad.

This, it said, reflects the open and regional nature of the banking sector. 

Non-resident holdings of domestic government bonds are high at about 22% of the total. It said the holdings are mostly stable in part due to Malaysia’s deep and well-developed domestic bond market relative to regional peers.

On the banking sector, Fitch said moderate interest-rate hikes and a robust economy should keep credit impairments manageable.

Banks’ earnings prospects are stable and credit costs continue to normalise, but remain above pre-pandemic levels, it said.

Fitch said Malaysia has an Environmental, Social and Governance (ESG) Relevance Score of 5+ for both political stability and rights and for the rule of law, institutional and regulatory quality and control of corruption. 

It said that these scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in its proprietary Sovereign Rating Model for all sovereigns.

Malaysia has a medium WBGI ranking at 64th percentile, reflecting a recent record of peaceful political transitions, as well as continued political uncertainty, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption, although there have been some high-level cases in recent years, it said.