By G. Sharmila
International ratings agency Moody’s Investors Service today revised Malaysia’s sovereign outlook from “positive” to “stable” and affirmed the Malaysian government’s issuer and senior unsecured bond ratings at A3.
The first key driver of the outlook revision is the deterioration in Malaysia’s growth and external credit metrics due to external pressures over the past year. Secondly, Moody’s was also concerned over macro-financial risks posed by system-wide leverage, which remains high.
Thirdly, Moody’s expectation is that despite progress on fiscal consolidation, Malaysia’s public debt burden and debt affordability will see only limited improvement over the outlook horizon.
“The decision to stabilise Malaysia’s A3 government bond rating at A3 rather than at A2 balances the negative impact of changes in the external environment on Malaysia’s growth, external balance and reserves since the assignment of a positive outlook in November 2013, together with the risks posed by existing domestic imbalances, against the positive impact of the fiscal consolidation seen since then,” Moody’s said in a statement today.
According to Moody’s, the assignment of a positive outlook to Malaysia’s A3 government bond rating reflected Moody’s view that continued improvements in the government’s balance sheet could further enhance Malaysia’s fundamentals.
“The period since then has indeed seen further fiscal consolidation, including through the implementation of the goods and services tax (GST) and the rationalisation of fuel subsidies.
“However, the impact on the government’s balance sheet has been, and will continue to be, limited. That partly reflects changes in the external environment which have reduced government revenues over the period. Those environmental changes have also undermined Malaysia’s external position, with large capital outflows, a falling current account surplus, sharp exchange rate depreciation and falling reserves,” Moody’s said.
“And alongside rising external exposure, material domestic imbalances continue to pose a risk to growth and the financial system. Household debt levels remain high by the standards of Malaysia’s peers,” the ratings agency added.
Commenting on the affirmation of the A3 rating, Moody’s noted that Malaysia has weathered the stresses of the past year with many of its fundamentals largely intact.
“Although lower commodity prices, weak consumer and business sentiment, and lacklustre growth among the country’s largest trading partners pose prominent downside risks to both exports and domestic demand, we expect Malaysia to continue to grow faster than other A-rated countries this year and over the medium term,” it said.
“Macroeconomic stability is anchored by the credibility of the country’s central bank, Bank Negara Malaysia, which has exhibited a solid track record of maintaining low inflation and a stable banking system. Malaysia’s inflation performance is supportive of Moody’s assessment of the country’s institutional strength.
“Malaysia’s sovereign rating also continues to be supported by the government’s favourable debt structure and the depth of onshore capital markets, both of which mitigate the impact of capital account and exchange rate volatility,” the ratings agency said.
According to Moody’s, the stable outlook suggests that the upside and downside risks are balanced. “Nonetheless, upward pressure on the sovereign’s rating could arise from a greater convergence in debt metrics with similarly-rated peers, accompanied by improvements in debt affordability and fiscal deficit reduction.”
“Conversely, a significant worsening in Malaysia’s debt dynamics – possibly arising from an inability to manage the impact of lower crude oil and agricultural commodity prices – on the fiscal accounts or the crystallisation of large contingent liabilities, could exert downward pressure on the rating,” it added.
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