Malaysia's A3 stable credit profile supported by economy, growth prospects

Fitch Ratings has affirmed Malaysia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-' with a Stable Outlook.

KUALA LUMPUR: Malaysia's A3 credit profile is supported by its large and diversified economy, ample natural resources and robust medium-term growth prospects, says Moody's Investors Service.

The rating agency said on Friday pointed out the relatively high government debt burden was balanced by a favorable debt structure and large domestic savings. 

“Credit challenges include the implementation of further fiscal consolidation and external vulnerability as indicated by sizeable external debt repayments relative to reserves,” it said.

Moody's said the stable outlook balances long-standing credit constraints – a high debt burden and vulnerability to external risks – against inherent credit strengths, including resilient economic growth and the presence of sizeable domestic institutions providing stable financing conditions for the government’s debt.

It pointed out that in the absence of further fiscal reform, “we expect only limited improvement on Malaysia's public indebtedness and debt affordability”.

However, a robust growth path, which provides the base for an expansion in nominal GDP, lends stability to this debt burden.

Moody's said upward pressure on the sovereign's rating could arise from (1) a material convergence in government debt levels with similarly rated peers, accompanied by improvements in debt affordability and continued fiscal deficit reduction; and (2) a reduction in external vulnerability risks, such as through a containment of the rise in short-term external debt liabilities, or through effective use of macroprudential tools to limit volatility in capital flows durably.

However, downward rating pressure could come from (1) a significant worsening in Malaysia's debt dynamics – possibly arising from a renewed fall in commodity prices or the crystallisation of contingent liabilities; (2) a deterioration in the balance of payments position or material capital flight which puts further pressure on reserves; and (3) a long-lasting negative shock to the economy, possibly amplified by high household debt levels.

“Malaysia's A3 stable rating reflects “Very High (-)” economic strength, “High (+)” institutional strength, “Moderate (+)” fiscal strength, and “Moderate (-)” susceptibility to event risk,” it said.

Moody's said its assessment of Malaysia's “Very High (-)” economic strength incorporates the country's large scale and diversification, ample natural resources, and robust medium-term growth prospects. 

The country's combination of a well-developed infrastructure, a competitive services sector (particularly in financial services and tourism); a manufacturing sector that is competitive in several niche areas; and substantial natural resources compare favorably with A-rated peers.

It also pointed out that Malaysia's institutional strength is set at “High (+)”, below the indicative score of “Very High (-), to capture its assessment that corruption and imperfect implementation of the rule of law constrain government effectiveness to a greater degree than the Worldwide Governance Indicators indicate. 

Nonetheless, the score reflects the country's solid institutional and policy-making framework. Malaysia also fares well in terms of inflation performance, a sign of credible and effective policymaking.
Commenting on the “Moderate (+)” score for fiscal strength balances the government's sizeable fiscal deficits and higher debt burden compared to most A-rated peers against favorable funding conditions and debt structure.

Revenue mobilisation as a share of GDP is one of the lowest among A-rated economies and has fallen further in recent years. Although previous fiscal reform and improvements to tax administration have led to a widening of the revenue base, overall revenue growth has been dampened by lower oil-related receipts.

Expenditures have also been trimmed accordingly – in particular, through subsidy reform – which has contributed to the ongoing trend of progressively narrower fiscal deficits, although further fiscal consolidation is likely to be limited. 

Meanwhile, Malaysia's fiscal financing requirements are supported by a large pool of domestic savings that has allowed the government to fund itself almost entirely in local currency.

“We consider Malaysia’s susceptibility to event risk to be “Moderate (-)”, it said.

This is driven by external vulnerability risk, which is set at “Moderate (-)”, above the indicative score of “Low (+)”, as the current account surplus and the External Vulnerability Indicator (EVI) - which measures the ratio of external debt repayment needs during the year to foreign reserves - do not fully capture Malaysia's exposure to weakness in international trade, lower commodity prices, and capital flow volatility. 

“However, we also juxtapose these exposures against certain mitigating factors, including a deep domestic capital market, a surplus net investment position, and sizeable export proceeds,” it said.

Malaysia's banking sector risk is set at “Low”, above the indicative score of “Low (-)” to more broadly capture the risks and challenges from high system-wide leverage, particularly in the household sector. 

Nevertheless, the banking system remains stable and wellmanaged, posing limited contingent risks to the government's balance sheet.

“We assess Malaysia's Government Liquidity Risk at “Very Low (-)”. Despite relatively high government debt levels, the sovereign’s ability to raise financing has not been adversely affected. Ease of access to capital markets is a key credit strength of the Malaysian government and helps to keep its effective borrowing costs at low levels relative to peers.

 A sovereign issuer’s “susceptibility to political event risk” reflects the probability of such an event occurring, and the severity of its impact on the sovereign’s credit profile. 

“We gauge such risks as “Low(-)” for Malaysia, reflecting a low probability and low-impact scenario, given relatively calm geopolitical relations, as well as the fact that although domestic political risks have increased in recent years, they have not adversely affected policy reform as the government has demonstrated commitment to its fiscal deficit reduction goals,” said Moody's.