Fitch Affirms Malaysia at 'A-'; Outlook Stable
KEY RATING DRIVERS
Malaysia's rating of 'A-' reflects its strong net external creditor position, real GDP growth that remains stronger than the median of 'A' rated peers and a current account that is still in surplus although it has been narrowing. Malaysia's economy has been slowing, but real GDP growth on average is still stronger that the 'A' median. The rating remains constrained by structural indicators that are weaker than the 'A' median, and federal government debt and deficit levels that are larger than some of its peers in the 'A' rating category.
The economy continues to slow and Fitch forecasts real GDP growth of 4% in 2016, down from 5% last year. However, on average real GDP growth still remains stronger than the 'A' median. Private consumption demand and continued spending on strategic projects by the government and state-owned enterprises are likely to support growth, countering some of the downside pressure from weak external demand.
Continued fiscal consolidation has supported stabilisation in the federal government debt and deficit ratios. However, as compared with the 'A' medians, the levels of government debt and deficits remain a weakness. Fitch currently expects the debt ratio to increase gradually over 2017-2018, but still remain below the authorities' self-imposed federal government debt ceiling of 55% of GDP. Fitch forecasts government debt to decline to less than 54% of GDP at end-2016 from 54.5% at end-2015. However, this forecast includes the authorities' plan to transfer close to MYR22bn (around 2% of estimated 2016 GDP) of federal government debt to the Public Sector Home Financing Board. For 2016, Fitch forecasts a slightly higher deficit of 3.2% of GDP compared with the authorities' target of 3.1%, mainly due to a less optimistic growth outlook than the authorities. Federal government guarantees have stabilised at their 2013 levels and at end-2015 were at 15.4% of GDP.
Fitch forecasts Malaysia's net external creditor position to remain in line with the 'A' median at the end of 2016. The current-account surplus has been narrowing, but is likely to remain in a surplus of close to 1% of GDP in 2016. Fitch forecasts import growth to remain reasonably strong on continued investment spending, while exports are likely to remain subdued because of weak external demand. Portfolio flows and foreign-exchange reserves have stabilised since 3Q15 and Malaysia's external liquidity position remains stronger than the 'A' median as measured by the reserve coverage of current external payments and Fitch's liquidity ratio.
Household debt remains high and has been growing, and the ratio of household debt to GDP was just under 90% of GDP at the end of 1Q16, up from 86.8% at the end of 2014. However, the pace of increase in household loans has slowed to 6.2% at end-June 2016 from 9.4% at the end of 2014. The high level of household indebtedness could pose a risk to the banking sector in the event of an increase in interest rates or an income or employment shock. However, household balance sheets remain healthy in aggregate, banking-sector asset quality and capitalisation levels are strong, and Malaysia's banking system risk indicator score is 'bbb', in line with those of Poland (A-/Stable) and Israel (A/Positive).
Malaysia's structural indicators - especially income levels and standards of governance - are weaker than many of its peers in the 'A' rating category. Malaysia scores especially low on political stability and voice and accountability in the World Bank's governance indicators. Weakness in Malaysia's governance standards is highlighted by the ongoing issues with state-owned investment fund 1Malaysia Development Berhad (1MDB), which is currently under international investigation for charges of embezzlement of funds. So far, there is no discernible negative impact on economic policy-making, but the agency would be monitoring developments for any long-lasting impact that this affair could have on political stability, policy making or investor confidence.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Malaysia a score equivalent to a rating of 'A-' on the Long-Term Foreign-Currency IDR scale.
Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
The main factors that could, individually or collectively, lead to a negative rating action include:
- Deterioration in political stability or governance that leads to a weakening of credibility of policy-making institutions.
- Deterioration in fiscal discipline and broader public finances leading to higher government debt and deficit ratios.
- A further weakening of the balance of payments that strains domestic economic and/or financial stability.
The main factors that could, individually or collectively, lead to a positive rating action are:
- Sustained reductions in government debt ratios or contingent liabilities.
- Narrowing of structural weaknesses relative to peers, including GDP per capita and governance standards.
- The global economy performs broadly in line with Fitch's Global Economic Outlook.