Fitch Affirms Malaysia at 'A-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Malaysia's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'A-' and 'A' respectively with Stable Outlooks. The issue ratings on Malaysia's senior unsecured local-currency bonds are also affirmed at 'A'. The Country Ceiling is affirmed at 'A' and the Short-Term Foreign-Currency IDR at 'F2'.
KEY RATING DRIVERS
Malaysia's IDRs reflect the following key rating drivers:
- The authorities have remained committed to their fiscal consolidation path, adopting a budget recalibration in January 2016 that cut 0.6% of GDP from spending to match a decline in oil revenues and other smaller revenue adjustments. Fitch views the macroeconomic assumptions in the recalibrated budget as broadly realistic: the budgeted oil price is expected to average USD30-35 per barrel in 2016 while Malaysian GDP growth is projected in a range of 4%-4.5%. Fitch expects the ratio of federal government debt to GDP to rise modestly to 2017 but to remain below the authorities' 55% policy ceiling. Contingent liabilities in the form of explicit federal-government guarantees have stabilised at around 15% of GDP since 2013.
- The ringgit fell by 18.6% against the US dollar in 2015, or by 13.5% on a nominal trade-weighted basis, while foreign reserves dropped by 18%. The decline in global oil prices that began in August 2014 coincided with the onset of portfolio and debt-capital outflows from Malaysia that put pressure on the external finances, a situation that persisted for the first three quarters of 2015. However, the currency and reserves have stabilised since September 2015, despite a further decline in oil prices. Malaysia's external liquidity has weakened but remains in line with 'A' range peers' medians for coverage of current external payments and the liquidity ratio. Fitch expects the current account to remain in modest surplus out to 2017.
- The economy is slowing, but growth remains stronger than in 'A' peers. Fitch expects real GDP growth of about 4% in 2016 and 2017, below the five-year average of 5%. Credit growth of 7.9% in 2015 was the weakest since 2009 partly owing to a tightening of financial conditions faced by the banks, to which the central bank responded with an easing of reserve requirements in January 2016. However, the decline in the Malaysian ringgit has supported non-commodity exports, and the government and state-owned enterprises expect to continue with strategic investment projects.
- Malaysia's Banking System Indicator of 'bbb' is in line with that of Poland (A-/Stable) or Israel (A/Stable), although weaker than those of the Czech Republic or Chile (both A+/Stable). The Malaysian private sector is relatively highly indebted. Bank credit to the private sector was the third-highest among Fitch-rated emerging markets at end-2015, at 121% of GDP (behind only China and Thailand). Aggregate indebtedness across the Malaysian economy rose by 43 percentage points of GDP between end-2007 and June 2015 according to Bank of International Settlements data, more than in Thailand, Brazil or Turkey although much less than in China (+91pp). Malaysian household debt has grown fastest, by nearly 18pp against 17pp for the general government. High private-sector debt lessens the resilience of the Malaysian financial system and sovereign credit profile to macroeconomic volatility, such as a sharp rise in unemployment or interest rates, if it occurred.
- Malaysia's levels of income (at market exchange rates) and development are weaker than 'A' range medians and closer to 'BBB' range norms. Governance is also a weakness relative to other sovereigns in the 'A' rating range. Malaysian politics and governance standards have come under the spotlight due to a range of domestic and international investigations into the state-owned investment company 1Malaysia Development Berhad (1MDB). However, the political heat generated by these issues has not so far had a discernible impact on policy-making. For example, the government has pressed ahead with controversial structural fiscal reforms, including a goods and services tax and reduction in fuel subsidies.
- Sovereign funding flexibility benefits from Malaysia's deep local capital markets. The share of government debt denominated in ringgit is very high (over 95%). The Malaysian sovereign has no debt restructuring history.
The Stable Outlooks reflect Fitch's assessment that upside and downside risks to the ratings are current broadly balanced.
The main factors that could, individually or collectively, lead to a negative rating action are:
- A sustained deterioration in fiscal discipline and the public finances leading to a sharper rise in government debt ratios than Fitch currently expects
- Further weakening of the balance of payments that strains domestic economic and/or financial stability
- Deterioration in political stability or governance that lead to a weakening of credibility of policy-making institutions
The main factors that could, individually or collectively, lead to a positive rating action are:
- Sustained reductions in government debt ratios
- Narrowing of structural weaknesses relative to peers, including development indicators and governance
The ratings assume the global economy evolves broadly in line with the projections in Fitch's latest Global Economic Outlook; that there is no sharp, disruptive slowdown in China; and that there is no global systemic crisis in emerging markets.