KUALA LUMPUR: Fitch Ratings has affirmed Malaysia’s long-term foreign-currency issuer default rating (IDR) at ‘A-’ with a stable outlook.
The ‘A-’ rating reflects higher growth rates than the peer median and a net external creditor position which is supported by steady current account surpluses and large external assets.
However, the rating is constrained by high government debt, low per capita income levels and weak standards of governance relative to rating peers, Fitch said in a statement.
The Pakatan Harapan governing coalition moved swiftly to implement many of its key election promises upon taking office in May 2018, most notably repeal of the Goods and Services Tax (GST) and a review of infrastructure projects.
It provided greater detail about its macroeconomic policies in the 2019 Budget announced in early November.
“The budget’s medium-term fiscal targets are less ambitious than those of the previous government, due in large part to anticipated net revenue loss of around one percent of gross domestic product (GDP) from the removal of GST and its replacement with the Sales and Service Tax (SST),” it said.
Wider deficits and debt levels are negative for the credit profile, but are offset somewhat by steps announced in the budget to improve fiscal transparency and public debt management.
The 2018 Budget deficit target was revised up to 3.7 percent of GDP from 2.8 percent previously, to take into account one-off tax refunds and certain expenditure items that were previously off-budget which add up to around 1.4 percent of GDP.
The authorities subsequently met the revised 2018 deficit target, supported by higher-than-expected SST collections which offset lower corporate income tax collection. Meanwhile, the 2019 Budget targets a deficit of 3.4 percent of GDP in 2019 and 3.0 percent of GDP in 2020.
The authorities expect to meet their 2019 deficit target through a higher dividend from Petroliam Nasional Bhd (Petronas, A-/Stable) and additional revenue measures including higher property taxes and an increase in stamp duty, as well as introduction of a departure tax.
Fitch said it sees downside risks to the 2019 deficit target.
In particular, the 2019 Budget is based on an optimistic oil price assumption of US$70 (US$1=RM4.07) per barrel (b), above Fitch’s forecast of US$65/b. The budget is also based on implementation of additional revenue-raising measures that may face political constraints, and on optimistic growth assumptions.
However, Fitch assumes expenditure cutbacks will offset any revenue shortfall, and forecasts a general government deficit of 3.4 percent of GDP in 2019 (current ‘A’ median -1.7 percent), in line with the authorities’ target.
Substantial non-oil revenue measures would be required for the government to meet its medium-term deficit targets unless oil prices recover, posing a risk to the fiscal outlook in Fitch’s opinion.
Fitch forecasts general government debt-GDP to stabilise at around 62 percent in 2019 and 2020, above the current peer median of 49 percent.
“Our debt numbers include officially reported committed government guarantees. Beyond the fiscal risks outlined above, there are risks to debt containment from contingent liabilities related to public-private partnerships which may migrate to the sovereign balance sheet as the government continues to improve the transparency of public finances.”
Fitch expects growth to slow to around 4.5 percent in 2019 and 2020 from 4.7 percent in 2018, on weaker export performance and slowing investment activity, but to remain above peers.
Five-year average GDP growth at end-2018 was 5.2 percent, against a current peer median of 3.3 percent.
The outlook for exports is uncertain because of trade tensions between the US and China and Fitch’s expectations for low oil prices.
However, the credit rating agency believes private consumption is likely to remain supportive of growth due to favourable labour market conditions and the government’s plans to disburse income tax and GST refunds of around RM37 billion (2.5 percent of GDP) during the year.
“The growth outlook is subject to downside risk, as elsewhere in the region, from the slowdown in China and a further escalation of trade tensions with the US.”
The current account surplus declined to 2.3 percent of GDP in 2018 from 3.0 percent in 2017 on weaker exports of electronics and commodities.
“We expect the current account surplus to narrow further in 2019 as demand for some key exports such as electronics, oil and liquefied natural gas is likely to stay weak. Sustained current account surpluses have helped Malaysia retain its net external creditor position (estimated at 14.2 percent of GDP at end-2018, compared with a net debtor position of 16.8 percent for current rating peers), which is a strength for its credit profile.”
Fitch said Malaysia is vulnerable to shifts in external investor sentiment because of high short-term external debt, high foreign holdings of government debt, and an international liquidity ratio which is just over 100 percent.
Foreign-currency reserves fell in 2018 to US$101.4 billion (4.8 months of current external payments; current peer median 4.3 months) as the central bank, Bank Negara Malaysia intervened during the year to dampen depreciation pressures. Reserves have picked up subsequently as pressures on emerging markets have subsided.
Structural metrics, such as GDP per capita, standards of human development and governance remain below ‘A’ category medians.
One of the key campaign promises of the current administration was to set up a royal commission of inquiry into recent corruption scandals and to further improve the transparency of public finances. These measures could bode well for transparency and governance, although the improvements may take time to materialise.
“We forecast the banking sector’s performance to remain broadly stable despite some softening in growth and pockets of asset-quality risk in some sectors. Profitability among Fitch-rated banks should hold up well, and bank balance sheets to remain generally sound – which should help the sector weather unexpected shocks.”
The sector’s Common Equity Tier 1 ratio and Liquidity Coverage Ratio of 13.1 percent and 143 percent, respectively, at end-2018 indicated healthy capital and liquidity positions in aggregate. – Bernama
