KUALA LUMPUR – July 1, 2015: International ratings agency Fitch Ratings has affirmed Malaysia’s Long-Term foreign currency Issuer Default Rating (IDR) at ‘A-‘ and local currency IDR at ‘A’.
The issue ratings on Malaysia’s senior unsecured local currency bonds are also affirmed at ‘A’ while the outlook on the long-term IDRs has been revised to Stable from Negative.
The Country Ceiling, which is the limit of the ability to pay for default, is affirmed at ‘A’ and the short-term foreign currency IDR is also affirmed at ‘F2’ (good credit quality).
Fitch, in a press statement released yesterday said that the affirmation of Malaysia’s IDRs and the revision of the outlook to stable reflects the several key rating drivers that includes the improvement of fiscal finances.
“Malaysia’s fiscal finances have improved since last year with the general government deficit falling from 4.6 per cent of Gross Domestic Product (GDP) in 2013 to 3.8 per cent of GDP in 2014.
“The general government debt/GDP has also declined from 54.7 per cent at the end of 2013 to 53.9 per cent at the end of 2014.
“Fitch views progress on the Goods and Services Tax (GST) and fuel subsidy reform as supportive of the fiscal finances and a further narrowing of the deficit is forecasted in 2015 despite lower oil prices,” the statement read.
Despite the positive improvement, Fitch claimed that Malaysia’s fiscal position continues to remain weak as the general government debt as a share of GDP at the end of 2014 was 53.9 per cent, which is still above the ‘A’ median of 47.2 per cent.
Fitch also pointed out that weaker external liquidity but still above ‘A’ median is one of the key rating drivers that affirmed Malaysia’s IDRs and the revision of the outlook to stable.
“Malaysia’s external liquidity position has weakened, with reserve coverage of short-term external debt falling to 1.1 times by the end of 2014, as against 1.3 times at the end of 2013.
“As per Fitch’s broader external liquidity metric as well, Malaysia’s liquidity ratio had weakened to 113.2 per cent by the end of 2014, from 130.0 per cent at the end of 2013.
“However, despite the deterioration, Malaysia’s external liquidity ratio was above the ‘A’ median of 104.6 per cent and it is expected to improve over the forecast period. The country remained a net external creditor at the end of 2014 as per Fitch estimates,” the statement read.
The declining current account surplus has also contributed to the affirmation of Malaysia’s IDRs.
As Fitch reported, the current account surplus continues to decline and from an average of 15.6 per cent of GDP from 2005 to 2009, had fallen to 7.2 per cent b/w 2010 to 2014.
Fitch believed that the fall is driven by a decline in the savings rate and a pickup in investments that is partly driven by the Economic Transformation Programme.
Nevertheless, the current account surplus of about 4 per cent in 2014 was above the ‘A’ median of 1.7 per cent while the current account surplus forecast for 2015 is 1.4 per cent and 1.1 per cent in 2016.
Malaysia’s flexibility in the fiscal financing has also led to the IDR’s affirmation as Fitch stated that the depth of the country’s local capital markets supports the sovereign’s domestic financing needs.
It said that while the share of non-resident holdings of government securities is high and a weakness in the sovereign’s debt profile, local agencies such as Employee Provident Fund (EPF) can provide funding to support to the sovereign in the event of a sell-off by non-residents.
Fitch has also found the rising contingent liabilities to be one of the key rating drivers.
“Federal government debt and explicit guarantees continue to increase and the total federal government’s explicit guarantees at the end of 2014 rose to 16 per cent of GDP from 15.4 per cent a year earlier.
“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 1Malaysia Development Berhad (1MDB).
“Fitch thinks there is a high probability that sovereign support for 1MDB would be forthcoming if needed,” it said.
Malaysia’s average income level at market exchange rates is playing a significant role as well as 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.
The other key rating driver is the favourable GDP growth rates as the nation’s rating remains supported by reasonably strong real GDP growth rates and low inflation volatility.
“Malaysia’s five-year real GDP growth averaged 5.8 per cent over 2010 to 2014, as against 3.1 per cent for the ‘A’ median, whereas inflation volatility was 1.3 per cent as against 1.7 per cent for the ‘A’ median,” Fitch’s report noted.
Meanwhile, Malaysians are rejoicing upon the breaking of the news.
Institute of Strategic and International Studies (ISIS) economic analyst Ahmad Rafdi Endut when contacted said the report indicates that the country’s economy is stable.
“The economy seems to be just fine in terms of credit. Malaysia has the ability to pay any default on time and any bonds that have been taken or sold will have a very low default risk.
“However, it must be noted that the rising debt in state owned enterprises have a risk on the rating.
“In terms of national account, the policies such as GST and fuel subsidy reform help to improve the financing of the government and lowering the risk of default,” he said.
Rafdi explained to The Mole that the Long Term’s foreign currency IDR is defined as ability to repay any default in the foreign currency.
This is slightly different from the Long Term’s Local IDR which is the ability to repay any default in local currency.
As to the rating given, he described it as the level of credit quality with ‘A’ being a high rating.
“’A’ ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong.
“This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings. The rating of ‘A-‘ that was given to Malaysia is also in the category of low credit risk.
Rafdi added that Malaysian government bond too has a low risk of default and good payment which means it is safe to buy the bond as the default risk is very low.
Blogger Datuk Akbar Ali of the Darah Tuah blog had also welcomed the good news from Fitch.
“Congratulations to the government, especially to the Minister in the Prime Minister’s Department Datuk Seri Abdul Wahid Omar who is in charge of Economic Planning for the improvement in the rating following his effort in navigating the economy.
“However, we should not have the habit of using this kind of yardsticks only when they are in our favour and berkuntau (frantic) when they are not,” he said.
Akbar nonetheless addressed certain potentially threatening issues in the economy such as the rising cost of living, increasing unemployment and ‘widening inequalities’.
“Government should provide the justification in the hiking of retail price of petrol and explain the remedial actions to mitigate the spiral increase in prices,” he added.