BUSINESS

MOODY’S AFFIRMS A3 RATING, MAINTAINS STABLE OUTLOOK ON MALAYSIA

07/12/2018 08:57 PM

KUALA LUMPUR, Dec 7 (Bernama) -- International rating agency Moody’s Investors Service has affirmed the Malaysian government’s local and foreign currency issuer and senior unsecured debt ratings at A3 with stable outlook.

The rating affirmation recognises that Malaysia’s fiscal strength has weakened, while the stable outlook balances credit constraints from low-debt affordability and a high-debt burden against inherent credit strengths, including resilient economic growth and a stable and broad funding base for the country's debt.

“Government debt will stay high longer and the government's fiscal policy choices will narrow the revenue base and reduce fiscal flexibility further,” Moody’s said in a statement today.

Following a change in the government after the general election in May 2018, the new government has signalled a significant shift in policy priorities towards supporting lower incomes and enhancing the transparency of public finances.

Moody’s said the government’s fiscal choices, most notably the abolition of the Goods and Service Tax (GST) would have long-lasting negative effects on revenue collection.

Moreover, it believed the measures implemented and announced would lead to a concentration of the revenue base on oil-related revenues and a dependence on non-tax revenues, such as dividends from state-owned enterprises, that would limit fiscal flexibility in future years.

The rating agency, however, said robust growth potential, notwithstanding a slowdown in the next few years, and deep domestic capital markets would continue to support the rating at A3.

“A solid institutional framework, including strong monetary policy effectiveness, also supports the credit profile, although in Moody's view, the government will face hurdles to significantly reining in pervasive corruption,” it said.

Moody’s placed Malaysia among the fastest growing A-rated sovereigns after China (A1 stable), Ireland (A2 stable) and Malta (A3 positive) in the last five years, at an annual average growth of 5.2 per cent.

“We expects gross domestic product (GDP) growth to slow to slightly under five per cent from 2018, owing to slower trade flows and lower investment growth.

“Nevertheless, growth will remain stronger than the median average for A-rated sovereigns,” it said.

In the longer term, Moody’s believed that Malaysia’s economic prospects were supported by well-developed infrastructure, substantial natural resources, globally competitive manufacturing and services sectors.

Robust growth is expected to contribute to rising incomes from already strong levels, at just under US$30,000 in GDP per capita terms and at purchasing power parity.

Malaysia’s deep capital markets also provide a stable funding base at moderate costs and government debt is nearly entirely (97.6 per cent) financed in local currency, sheltering the balance sheet from a sudden rise in the debt burden as a result of a depreciation of the ringgit.

Moody’s said two-thirds of overall government debt was held by domestic investors that were large and long-term, such as the Employees Provident Fund and Retirement Fund (Incorporated), the civil servant pension fund.

“Malaysia’s institutional framework has demonstrated sound monetary policy management and relatively strong governance, supported by a skilled bureaucracy.

“The legal and regulatory frameworks are supporting robust growth and macroeconomic stability. Stable inflation at low levels denotes effective monetary policy,” it said.

However, Moody’s opined that pervasive corruption has acted as a credit constraint, undermining government effectiveness.

Over the medium term, it said the probability of an upgrade would rise materially should the scope for fiscal consolidation increase significantly, in particular through measures that broadened the currently narrow revenue base, and its pace accelerated substantially, which would point to a decline in the government debt burden and improvements in debt affordability.

“A reduction in external vulnerability risks, such as through a reversal of the rise in short-term external debt liabilities that would diminish Malaysia's sensitivity to confidence-based capital flows would also support a rating upgrade,” Moody’s said.

On the other hand, the rating agency said Malaysia’s rating would likely be downgraded should the country revise its prospects for fiscal consolidation and anticipate a marked increase in government debt over the next few years.

“This can result from more limited scope to cut expenditure than currently assumed and/or a pronounced and lasting negative economic shock that undermines government revenue.

“More significant financial support to state-owned enterprises over a number of years will also weaken fiscal strength,” it said.

Moody’s said rising political tensions and divergences of views within the government could undermine policy effectiveness.

“If this was likely to impair the government's capacity to adhere to its fiscal consolidation objectives and/or threatened the stability of capital flows in Malaysia, this could also lead to a rating downgrade,” it said.

It added that long-lasting tensions between the US and China, significantly slower global trade and heightened uncertainty about the trade environment impeding investment could undermine Malaysia’s economic strength while putting downward pressure on the country’s rating.

Meanwhile, Moody’s also affirmed the backed senior unsecured US dollar trust certificates issued by Malaysia Sovereign Sukuk Bhd and the backed senior unsecured debt issued by Malaysia Sukuk Global Bhd, special purpose vehicles established by the government at A3.

It said the payment obligations associated with these certificates were direct obligations of the government.

“In our opinion, the payment obligations represented by the securities issued by these two special purpose vehicles are ranked ‘pari passu’ with other senior, unsecured debt issuances of the government.

“As such, ratings for the sukuk issuances mirror the government's issuer rating,” Moody’s said.

It also affirmed the local currency ratings on the backed senior unsecured debt issued by Khazanah Nasional Bhd and guaranteed by the government at A3.

-- BERNAMA


BERNAMA provides up-to-date authentic and comprehensive news and information which are disseminated via BERNAMA Wires; www.bernama.com; BERNAMA TV on Astro 502, unifi TV 631 and MYTV 121 IFLIX channels and BERNAMA Radio on FM93.9 (Klang Valley), FM107.5 (Johor Bahru), FM107.9 (Kota Kinabalu) and FM100.9 (Kuching) frequencies.

Follow us on social media :
Facebook : @bernamaofficial, @bernamatv, @bernamaradio
Twitter : @bernama.com, @BernamaTV, @bernamaradio
Instagram : @bernamaofficial, @bernamatvofficial, @bernamaradioofficial
TikTok : @bernamaofficial

© 2024 BERNAMA   • Disclaimer   • Privacy Policy   • Security Policy