Fitch affirms Malaysia’s currency ratings, concerns over weak public finances
However, structural weaknesses in Malaysia’s public finances continue to weigh on the ratings. The country’s fiscal revenue base remains relatively weak, with federal revenues at 22.7% of GDP in 2009, against a 10-year average for the ‘A’ range of 34%.
Written by Fitch Ratings, The Edge
Fitch Ratings affirmed Malaysia’s Long-term foreign currency Issuer Default Rating (IDR) at ‘A-‘ with a Stable Outlook. However, it was concerned about the structural weaknesses in Malaysia’s public finances which continued to weigh on the ratings.
At the same time, the Long-term local currency IDR is affirmed at ‘A’ with a Stable Outlook. The agency has also affirmed the Short-term foreign currency IDR at ‘F2’ and the Country Ceiling at ‘A’.
Below is the Fitch statement issued on Thursday, July 8
“The deterioration in Malaysia’s public finances that motivated the local-currency rating downgrade in 2009 looks unlikely to be unwound soon. However, resumed economic growth will help stabilise public debt ratios and support the Stable Outlook on the ratings,” said Andrew Colquhoun, Head of Asia-Pacific Sovereigns at Fitch.
“The authorities’ structural reform agenda has the potential to improve Malaysia’s growth prospects, but the government’s ability to overcome political obstacles to reform is not assured and it will take concrete progress to exert upward pressure on the ratings.”
Fitch projects Malaysia’s federal government debt to reach 54.4% of GDP by end-2010, up from 41.4% at end-2008 and well above the ‘A’ median of 40%. The federal deficit hit 7.6% of GDP in 2009 on the agency’s measure and is projected to narrow only moderately to 6% in 2010.
The government announced extra spending worth about 1.6% of GDP in March 2010, indicating that fiscal consolidation is not the authorities’ top priority.
Fitch downgraded Malaysia’s local currency IDR by one notch in 2009 to reflect this fiscal deterioration, though the agency expects the debt ratio to stabilise as GDP growth resumes to a projected 6% in 2010, supporting the Stable Outlook on the ratings.
However, structural weaknesses in Malaysia’s public finances continue to weigh on the ratings. The country’s fiscal revenue base remains relatively weak, with federal revenues at 22.7% of GDP in 2009, against a 10-year average for the ‘A’ range of 34%.
Furthermore, fiscal dependence on the energy sector is high and rising, threatening higher revenue volatility in the medium-term. Energy-derived revenues were 41% of total fiscal revenues in 2009, up from 20% in 2003. The introduction of a goods and services tax, which could strengthen the revenue base, has been postponed into 2011.
However, the ratings remain supported by the sovereign’s ongoing access to funding from a deep domestic capital market and from international markets.
Some 30% of the debt was held within the broader public sector at end-2009, diminishing scope for shifts in investor sentiment to disrupt sovereign financing.
The external finances are the key rating strength, underpinned by current account surpluses (CAS) averaging 16.2% of GDP over 2005-2009.
The sovereign’s net foreign assets were worth 38% of GDP by end-2009, the third-highest ratio in the ‘A’ category (only behind China and Taiwan), with official foreign reserves at USD96.7bn.
However, Malaysia’s persistent CAS reflects an imbalance of domestic savings over investment, pointing to broader structural weaknesses in the economy that manifest themselves in limited domestic investment opportunities.
Malaysia’s average growth rate of 4.1% for 2005-2009 was only in line with the ‘A’ range median, despite Malaysia’s lower GDP per head of USD7000 in 2009, which is well below the ‘A’ median of USD16,800.
The government’s “New Economic Model” structural reform agenda is aimed at raising average annual growth to 6% out to 2015. While implementation of the agenda would be positive for Malaysia’s economic and sovereign credit fundamentals, Fitch notes that reforms will likely encounter considerable political opposition.
A faster than expected fiscal consolidation which puts the government debt ratios on a sustainable downwards path, along with measures to strengthen the fiscal revenue base, would exert upward pressure on the ratings.
Progress with the government’s structural reform agenda would tend to strengthen the economy’s growth prospects and the sovereign’s credit fundamentals. Conversely, renewed fiscal deterioration would see negative pressure build on the country’s ratings.
