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Wednesday, July 31, 2013

Fitch Ratings revised Malaysia's outlook


KUALA LUMPUR: Fitch Ratings revised Malaysia's outlook to “negative” from "stable" yesterday.
The revision of the outlook to negative reflects Fitch's assessment that prospects for budgetary reform and fiscal consolidation to address weaknesses in the public finances have worsened since the government's weak showing in the May 2013 general elections, it said yesterday.

In a statement from Hong Kong, the rating agency however said its long-term foreign and local currency issuer default ratings have been affirmed at `A-' and `A', respectively.

“Malaysia's public finances are its key rating weakness,” it added.

Federal government (FG) debt rose to 53.3 per cent of gross domestic product (GDP) at end-2012, up from 51.6 per cent at end-2011 and 39.8 per cent at end-2008.

The general government (GG) budget deficit (Fitch basis) widened to 4.7 per cent of GDP in 2012 from 3.8 per cent in 2011, led by a 19 per cent rise in spending on public wages in a pre-election year.
“Fitch believes it will be difficult for the government to achieve
 its interim 3.0 per cent FG deficit target for 2015 without additional consolidation measures.”
It sees risks even to the achievement of the agency's 3.5 per cent deficit projection, as this already factors in one percentage point of GDP of spending cuts. 

“This leaves Malaysia's public finances more exposed to any future negative shock.”
Fitch however, acknowledges strengths in the composition of Malaysia's debt and in its funding base.

The federal government debt is mostly denominated in local currency (97 per cent at end-2012) and has a smooth maturity profile.

Affin Investment Bank economist Alan Tan however felt that Fitch's move would lead other international rating agencies such as S&P and Moody's to downgrade Malaysia's sovereign rating outlook to negative in the near term.

“With Malaysia's economic fundamentals remaining sound, as reflected in the improving economic outlook, sustainable current account surpluses and steady increase in foreign exchange reserves, it is unlikely,” he said, in a report.

Hong Leong Investment Bank economist Sia Ket Ee commented that the downgrade came faster than expected.

“We had earlier expected that rating agencies will wait until early 2014 for the the implementation of GST (goods and services tax) and also for the assessment of weak commodity prices on current account account and growth before the change in outlook.”

Apart form the depreciation pressure on the ringgit, he expects the Fitch downgrade to lead to a revisit of the fundamentals of Malaysia.

Other headwinds for Malaysia include more moderate growth outlook due to its exposure to China, weak commodity prices, fatigue consumption and peaking investment cycle.

Hong Leong also expects a less favourable balance of payments as current account surplus shrinks rapidly, which would lead to a waning of currency lustre.

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