Malaysia Risk Tops Philippines on Najib Budget Gap

ARCHIVES 2013

By admin-j On Sep 6, 2013

Najib seems to be heeding those warnings with his decision to raise fuel prices, which drew a positive response from bond investors. The yield on Malaysia’s 3.48 percent ringgit-denominated notes maturing March 2023 fell 12 basis points, or 0.12 percentage point, to 3.97 percent this week, according to data compiled by Bloomberg.

(Bloomberg) – Malaysia’s default risk climbed above that of the Philippines for the first time as Prime Minister Najib Razak seeks to avoid a debt-rating cut, while his counterpart pitches for upgrades.

Contracts insuring Malaysian bonds against non-payment rose 63 basis points this year to 141, compared with an advance of 33 to 139 for its lower-rated neighbor, according to data provider CMA. Malaysia’s 10-year ringgit yield jumped 44 basis points to 3.92 percent, 16 basis points higher than the rate on similar-maturity Philippine notes, data compiled by Bloomberg show.

Najib announced fuel price increases on Sept. 2 for the first time since 2010 to curb subsidies that have strained the budget, after Fitch Ratings cut its outlook on the nation’s A-rating to negative from stable on July 30. Philippine PresidentBenigno Aquino is the only contender in Southeast Asia for an upgrade as Moody’s Investors Service placed its Ba1 ranking on review July 25, signaling an increase to investment grade.

“Malaysia’s creditworthiness is deteriorating and the country needs to address its fiscal and structural problems,” Nicholas Spiro, London-based managing director of Spiro Sovereign Strategy and a former consultant at Medley Global Advisors LLC, said in a Sept. 3 interview. “The Philippines is a lower investment-grade credit whose strengths have become more apparent.”

Rising Debt

The premium investors pay on Malaysia five-year credit-default swaps over those of the Philippines reached 10 basis points on Aug. 23, the most in CMA data going back to 2004. The cost was lower as recently as three weeks ago. The Philippines won investment-grade status this year from Fitch and Standard & Poor’s after cutting its budget deficit.

Malaysian government notes handed investors a 0.3 percent return in 2013, compared with 7 percent for the Philippines, the best performance among Southeast Asia’s five-biggest economies, according to indexes compiled by HSBC Holdings Plc.

Najib is facing rising debt levels as he seeks to attain developed-nation status by 2020, in addition to slowing economic growth and a shrinking current-account surplus. Fitch cited the country’s indebtedness and lack of budgetary reform for the rating outlook cut in July, saying Malaysia risks a downgrade in 18 months to 24 months unless it improves the fiscal position.

‘Warning Messages’

The prime minister is aiming to lower the budget deficit relative to gross domestic product to 4 percent in 2013, double President Aquino’s goal, while Malaysia’s debt-to-GDP ratio is 53.3 percent, compared with 51.5 percent in the Philippines.

“I am more bullish on the Philippines,” Sacha Tihanyi, a Scotiabank strategist in Hong Kong, said in a Sept. 4 interview. “The ratings agencies have been sending warning messages implying that without fiscal consolidation, Malaysia may be on the road to a ratings downgrade.”

He announced plans on Sept. 2 to bolster the nation’s finances that included a delay in some state-building projects that have high import contents in an effort to stem the current-account shrinkage. Strengthening the fiscal deficit position is vital to sustaining the economy’s resilience and enhancing public and investor confidence, he said, helping halt a selloff in 10-year debt over the past two weeks.