Fitch reversed its initial ratings projection on Malaysia and unequivocally attest to the sound fundamentals in the Malaysian economy and fiscal policies.
Malaysia Escapes Fitch Downgrade on Improvement in Finances
by Y-Sing Liau
July 1, 2015 — 1:51 AM HKT Updated on July 1, 2015 — 10:29 AM HKT
Fitch Ratings maintained Malaysia’s credit ranking at the fourth-lowest investment grade after signaling a downgrade earlier this year, saying finances are improving and growth remains steady. Stocks and the ringgit rose.
The outlook on the nation’s A- grade was revised to stable from negative, Fitch said in a statement Tuesday. A new consumption tax and fuel subsidy reforms are supportive of Malaysia’s finances even as federal government debt and explicit guarantees continue to increase, it said.
Concerns Malaysia could be downgraded for the first time since the Asian financial crisis have hurt sentiment in its asset markets with the currency near the weakest in a decade. Fitch had repeatedly warned contingent liabilities such as rising debt at a state investment company were weighing on the rating, contributing to investors souring on the country.
“Malaysia’s rating remains supported by reasonably strong real GDP growth rates and low inflation volatility,” Fitch said. “Fitch views progress on the Goods and Services Tax and fuel subsidy reform as supportive of the fiscal finances. A further narrowing of the deficit is forecast in 2015 despite lower oil prices.”
Malaysian stocks jumped the most in more than two years Wednesday, with the benchmark index climbing as much as 1.8 percent. The currency rose 0.8 percent to 3.7420 against the U.S. dollar as of 10:18 a.m. local time, data compiled by Bloomberg show. It was the worst performer in Asia in the first six months of 2015 and traded close to 3.8 this week, the level at which it was pegged from 1998 until 2005.
Fitch lowered Malaysia’s outlook to negative in 2013, citing weaker prospects for public finances. Moody’s Investors Service and Standard & Poor’s also rank Malaysia at their fourth-lowest investment grades. Moody’s has a positive outlook, while S&P’s is stable.
Andrew Colquhoun, Fitch’s head of Asia Pacific sovereign ratings, warned in March that there was more than a 50 percent chance of a downgrade. The Southeast Asian nation would “sit more naturally in the BBB range,” he said March 18.
The ratings affirmation gives Prime Minister Najib Razak more time to improve the country’s public finances, which have been weighed down by rising debt at state investment company 1Malaysia Development Bhd. and a decline in oil revenue.
1MDB’s borrowings amounted to 41.9 billion ringgit ($11.2 billion) as of March 2014 in part for the purchase of power plants and land. As the company’s troubled finances threatened Malaysia’s rating, Najib faced calls from former premier Mahathir Mohamad to step down as leader because of the performance of 1MDB, whose advisory board he chairs.
“Fitch continues to believe that the Malaysian sovereign is incurring additional contingent liabilities beyond explicit guarantees because of quasi-fiscal operations of state-owned entity 1MDB,” it said. “Fitch thinks there is a high probability that sovereign support for 1MDB would be forthcoming if needed.”
The decline in oil prices over the past year and the prospect of higher U.S. interest rates are also adding to pressure on the ringgit. Malaysia is an exporter of crude and derives about 22 percent of government revenue from energy-related sources.
Najib has trimmed expectations for expansion this year as his government cut expenditure amid lower-than-expected income from oil. The economy is forecast to grow 4.5 percent to 5.5 percent in 2015.
While Southeast Asia’s third-largest economy has run a fiscal deficit since 1998, the gap as a percent of gross domestic product has been narrowing. To boost state coffers, Najib scrapped a decades-old fuel subsidy policy in December and started a 6 percent goods and services tax in April.
The prime minister seeks a balanced budget by 2020 from a deficit target of 3.2 percent this year.
This is what Fitch thought on the Malaysian economy let year:
Bonds | Wed Jul 23, 2014 7:28am EDT Related: CURRENCIES, BONDS, MARKETS, FINANCIALS
Fitch Affirms Malaysia at ‘A-‘, Outlook Remains Negative
(The following statement was released by the rating agency) HONG KONG/LONDON, July 23 (Fitch) Fitch Ratings has affirmed Malaysia’s Long-Term Foreign and Local Currency Issuer Default Ratings at ‘A-‘ and ‘A’ respectively. The issue ratings on Malaysia’s senior unsecured local currency bonds are also affirmed at ‘A’. The Outlooks on the Long-Term IDRs remain Negative. The Country Ceiling is affirmed at ‘A’ and the Short-Term Foreign Currency IDR at ‘F2’.
KEY RATING DRIVERS The affirmation of Malaysia’s IDRs with Negative Outlooks reflects the following key rating drivers:- – Public finances are Malaysia’s key sovereign credit weakness and remain a source of downward pressure on the ratings. Federal government (FG) debt stood at 54.7% of GDP by end-2013, above the median of 50% for the ‘A’ rating category.
Malaysia’s FG debt ratio rose 14.9 points over 2008-2013, above the median increase of 12 points for the ‘A’ rating category. FG-guaranteed debt rose to 15.9% of GDP at end-2013 from 15.2% at end-2012 and 9% at end-2008. Taken together, explicit FG debt plus guarantees stood at 70.6% at end-2013, up from 48.8% at end-2008. – The government has set out a path of budget deficit targets, which, if followed, would stabilise and eventually reduce the headline FG debt ratio. The government targets a 3% deficit (on its definitions) in 2015, down from 3.5% in 2014 and 3.9% in 2013.
However, the path to achievement of the targets remains unclear. In particular, the shape of a new goods and services tax (GST), to be introduced in April 2015, has yet to be fully determined. The GST by itself is unlikely to deliver the targeted reduction in the deficit and additional revenue or spending measures would probably be required. It remains to be seen whether these will materialise. – Sustained heavy public sector deficits could increase the chances of the current account moving into deficit, which in turn could increase the possibility of disruptive volatility in portfolio capital flows.
The current account surplus as a proportion of GDP declined from an average 13% per year over 2003-2012 to 3.7% in 2013. Fitch projects the surplus to remain in the low single digits over 2014-16. Malaysia has experienced a decline in the savings rate and a rise in the investment rate driven partly by government deficits and partly by the Economic Transformation Programme, a government-led effort to raise investment. – High and rising household debt risks magnifying the impact of any future increase in macroeconomic volatility on the credit profile. Household debt rose to 86.8% of GDP at end-2013, up from 81.3% at end-2012 and 60.4% at end-2008, and above the US’s level (80.6% in 1Q14).
The central bank has warned that easy monetary conditions could lead to a broader build-up of economic and financial imbalances. The banking system indicator of ‘bbb’ is in line with rating peers. The net impaired loan ratio declined to 1.3% in 2013 from 1.4% in 2012, and the system’s common Tier 1 equity was 12.1% at end-May 2014. – Fitch believes contingent liabilities on the sovereign are rising beyond officially acknowledged debt and guarantees. The non-financial public sector ran a consolidated deficit of 13.6% of GDP in 2013, fuelled by 13.2% of GDP in capital spending by non-financial public enterprises. The government projects the deficit at 9.4% in 2014. Outside formally guaranteed debt, the state-owned investment vehicle 1MDB had further debt of 3% of 2013 GDP by March 2013, according to its published statements.
Despite the lack of formal guarantee, Fitch thinks there is a high probability that sovereign support for 1MDB would be forthcoming if needed. – Malaysia’s credit profile is supported by the high share of local currency denominated debt (97% of total debt at end-March 2014), and by relatively well-developed local capital markets and the high domestic savings rate, which support sovereign funding conditions. The share of domestic government securities held by non-residents was 26.8% at end-March 2014, although this figure has been stable in a range of 24%-28% since end-2011.
Local bidders, including the state Employee Provident Fund, could potentially buffer any volatility in foreign participation, although a withdrawal of foreign capital could still be temporarily disruptive and could drive a decline in foreign reserves. – The external finances remain a sovereign credit strength, notwithstanding diminishing current account surpluses. Malaysia’s net external creditor position of 29.6% of GDP at end-2013 exceeded the ‘A’ median of 10.8%.
Malaysia has experienced an unbroken run of annual current account surpluses since 1998. Official foreign reserves of USD134.9bn were worth 6.1 months of current external payments at end-2013, against a median 4.4 months for the ‘A’ range. The sovereign’s own net foreign assets were worth 19.7% of GDP at end-2013, exceeding the ‘A’ median of 12.8%. These factors provide important buffers given Malaysia’s higher export commodity dependence than peers (31% in 2013 against the ‘A’ median of 18%). – Malaysia’s average income level (at market exchange rates), broader level of development, and World Bank governance indicators are weaker than ‘A’ category medians and closer to ‘BBB’ category norms. These structural features weigh on the credit profile.
However, Malaysia’s relatively favourable demographic outlook supports medium-term growth prospects. – Malaysia’s real GDP growth is expected to average 5.6% per year over 2010-2014, well ahead of the ‘A’ median (3.5%). The level and volatility of inflation are in line with the ‘A’ median. Assessment of the strength of Malaysia’s macroeconomic performance is qualified by the contribution from large public sector deficits and rising private-sector leverage. Public investment contributed 1.5pp of 2012’s 5.6% growth rate, although official data indicate the contribution eased to 0.2pp of 2013’s 4.7% growth.
RATING SENSITIVITIES The Negative Outlooks reflect the following risk factors that may, individually or collectively, result in a downgrade of the ratings: – Fiscal slippage relative to the government’s targets and lack of progress on structural budgetary reform – Further rapid growth in FG guaranteed debt or other contingent liabilities – Emergence of “twin deficits” where failure to consolidate the public finances is associated with the emergence of a sustained current account deficit – A shock to interest rates or employment sufficient to impair household debt servicing capacity, leading to problems for the banking system – A shock to foreign investor confidence in Malaysia that leads to capital outflows on a scale that impairs Malaysia’s sovereign external balance sheet (via foreign reserves depletion) or proves disruptive for economic and financial stability. Given the Negative Outlooks, Fitch’s sensitivity analysis does not currently anticipate developments with a material likelihood of leading to a rating upgrade. However, future developments that may, individually or collectively, result in a revision of the Outlooks to Stable include: – Further progress towards achieving the government’s interim 3% deficit target by 2015 – Greater confidence in the authorities’ commitment to containment of direct and indirect public indebtedness in future KEY ASSUMPTIONS – Evolution of the global economy broadly in line with the projections in Fitch’s June “Global Economic Outlook”; in particular, the ratings assume a continued gradual recovery in the advanced economies and that China avoids a slowdown to a low single digit growth rate; and that oil prices do not decline substantially – No escalation of regional or global geopolitical disputes to a level that disrupts trade and financial flows – Maintenance of basic political and social stability in Malaysia Contact: Primary Analyst Andrew Colquhoun Senior Director +852 2263 9938 Fitch Ratings (Hong Kong) Ltd. 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Santiago Mosquera Director +1 (212) 908 0271 Committee Chairperson Paul Rawkins Senior Director +44 20 3530 1046 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: email@example.com. Additional information is available on http://www.fitchratings.com Applicable criteria, ‘Sovereign Rating Criteria’ dated 13 August 2012 and ‘Country Ceilings’ dated 09 August 2013, are available at http://www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here
Invariably, the confidence on Prime Minister Dato’ Sri Mohd. Najib Tun Razak’s administration and policies to move the economy forward with existing Transformation Agenda coupled with the recently tabled 11th Malaysia Plan (11MP) and 1MDB restructuring plans approved by Cabinet late May, brought upon these revisions of stance.