THE Covid-19 pandemic and ensuing economic ramifications have led to an almost unprecedented worldwide sovereign borrowing boom, causing governments’ debt levels breaking an all-time high.
Notwithstanding, the federal government debt level has also surged from 52.4% of gross domestic product (GDP) before the pandemic to 60.3% in 2022, to finance Covid-19 stimulus and recovery packages.
The government is cautious of the key risks that continue to rattle global and domestic markets which may affect investor sentiment.
Thus, the stability of the rating and any probable changes are closely monitored.
Ratings are published by various independent credit rating agencies (CRAs), in which the three main global agencies are Fitch Ratings, Moody’s Investors Service and S&P Global Ratings.
These CRAs use a transparent methodology for assessing national credit risk.
Malaysia’s rating was initiated by Moody’s in 1986 at BAA1, which was subsequently upgraded to A3 in 1990 and peaked at A1 in 1995.
S&P began rating Malaysia at A- in 1989, whereas Fitch first issued the rating of BBB- in 1998.
Consequently, the Asian financial crisis in 1997 and 1998 caused significant pressure on Malaysia’s ratings as well as most of the nations in the region, which resulted in several notches of rating downgrade.
Currently, Malaysia is rated at A3 (Moody’s), A- (S&P) and BBB+ (Fitch) which carry a “stable” outlook.
According to these CRAs, while there are various drivers for the present rating, fiscal performance is emphasised as the most important element for Malaysia, cited as a credit weakness.
This is mainly a result of Covid-19 stimulus and recovery packages that saw a deviation from the previous focus on fiscal consolidation, compounded by a low revenue base.
Therefore, fiscal performance is closely monitored as the CRAs are expecting Malaysia to revert to its previous path of consolidation.
Malaysia’s key rating strengths identified by the CRAs include diversified economy; resilient growth; overall predictable and stable institutions; established and strong banking system; as well as low exposure to foreign currency-denominated government debt.
As the sovereign credit rating reflects Malaysia’s creditworthiness, it also sets the bar for domestic issuers who are seeking to tap international markets.
Hence, market participants and the government continuously observe the stability and momentum of the rating as any change could affect the economy.
A sovereign credit rating downgrade can have an adverse impact on the bond market, which may trigger negative sentiment in the foreign exchange as well as stock markets and influence foreign direct investment decisions.
Malaysia remains vigilant to safeguard and ultimately improve the country’s relative standing with the CRAs as well as strengthen its position among rated peers.
Meanwhile, the federal government tax revenue stood at an average of 12.8% of GDP in the past 10 years.
As a result, ratings will be under pressure if there is a continuous rise in public debt and contingent liabilities, lower revenues, slower fiscal consolidation and unpredictable political circumstances.
Hence, fiscal performance is a crucial driver that can steer Malaysia back to the previous path of fiscal consolidation.
