Fitch Ratings affirms Malaysia at ‘A-’

Malaysia has maintained its 'A-' Fitch rating. The ratings are driven, among others, by a stable ringgit. – The Malaysian Insider file pic, February 23, 2016.Fitch Ratings has affirmed Malaysia's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at “A-” and “A” respectively with a stable outlook.

The issue ratings on Malaysia's senior unsecured local-currency bonds are also affirmed at “A” while the country ceiling is affirmed at “A” and the short-term foreign-currency IDR at “F2”.

The ratings were driven, among others, by the authorities commitment to fiscal consolidation path, stable ringgit, reserves and stronger economic growth, the ratings agency said in a statement today.

Fitch said the authorities had adopted a budget recalibration last month that cut 0.6% of gross domestic product (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," it said.

The ratings agency believed the ratio of federal government debt to GDP would rise modestly to 2017 but would remain below the authorities' 55% policy ceiling.

It noted that contingent liabilities in the form of explicit federal government guarantees had stabilised at around 15% of GDP since 2013.

Fitch said 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 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.

Fitch said Malaysia's external liquidity had weakened but remains in line with “A” range peers' medians for coverage of current external payments and the liquidity ratio.

It expects the current account to remain in modest surplus out to 2017.

The ratings agency pointed out that the economy was slowing, but growth remains stronger than in “A” peers.

Fitch predicted 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 banks, to which the central bank responded with an easing of reserve requirements in January.

However, the decline in the ringgit has supported non-commodity exports and the government and state-owned enterprises expect to continue with strategic investment projects.

It said 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 data released by the Bank of International Settlements.

Fitch said Malaysian household debt had also grown the fastest, by nearly 18 percentage points against 17 percentage points 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."

Meanwhile, 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, the rating agency said.

"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."

Fitch said sovereign funding flexibility benefited from Malaysia's deep local capital markets and the share of government debt denominated in ringgit was very high (over 95%).

The Malaysian sovereign has no debt restructuring history.

Fitch also said the ratings assumed the global economy evolved broadly in line with the projections in its latest global economic outlook where there was no sharp, disruptive slowdown in China, as well as, no global systemic crisis in emerging markets. – Bernama, February 23, 2016.