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Fitch affirms Malaysia’s long-term foreign, local currency ratings [02-08-2012]  
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Fitch Ratings has affirmed Malaysia’s long-term foreign and local currency issuer default ratings (IDRs) at A- and A respectively while the outlook for both ratings is stable.

The country ceiling and short-term foreign currency IDR were affirmed at A and F2 respectively.

“The ratings and outlooks reflect Malaysia’s track record of macroeconomic stability and strong net external creditor position. However, deterioration in public debt ratios, low and energy-dependent revenues, as well as structural weaknesses such as low average incomes weigh on the credit profile,” Fitch Ratings said in a statement yesterday.

Fitch said fiscal slippage or a lack of progress on fiscal reforms to reverse the deterioration in public debt ratios following the impending election could prompt negative rating action.

Conversely, sustained political willingness to implement fiscal reforms, leading to a strengthening of the fiscal revenue base, improving budgetary flexibility and lessening the reliance on energy-linked revenues streams would be supportive of the ratings at their current level.

Additionally, the successful implementation of the Government’s structural reform package, resulting in an uplift to the investment rate or a higher-trend GDP growth would be positive for the ratings.

Fitch Ratings said Malaysia’s public finances were weak relative to those of its A range peers.

“The rise in the federal government debt/GDP ratio and limited broadening of the fiscal revenue base have pushed Malaysia’s debt/revenues ratio (246% in 2011) well above the A and BBB range medians (137% and 119% respectively).”

“It is now on a par with more heavily indebted A range sovereigns such as Italy (261%) and Israel (180%). Fitch also notes this deterioration in debt ratios has occurred despite strong GDP growth (2010-2012 average GDP growth 5.4%),” it said.

“Malaysia’s public finances also exhibit structural weaknesses. General government revenues (24% of GDP in 2011) remain well below the A range median for general government revenues (33%),” Fitch Ratings said adding that moreover, the share of petroleum-related revenues was high at 36% of federal government revenues.

Fiscal flexibility is diminished by the weight of fuel subsidies in total expenditure (9% in 2011). It views “reform to address these vulnerabilities as unlikely until after a general election” (one must be called by end-June 2013). As the reform is likely to be controversial, the agency believes there is risk of further delays regardless of the election outcome.

Fitch expects Malaysia’s strong current account surplus to persist, underpinning the solvency of the sovereign external balance sheet. As a result, Malaysia maintains a net external creditor position (30% of GDP at end-2011) well above the A range median of 16%. The sovereign also benefits from low external debt and interest service ratios relative to A range peers.

However, a sharp increase in non-resident holdings of marketable domestically-issued medium- and long-term government debt (41% of foreign exchange reserves at end-June 2012, up from 21% at end-June 2008) suggests the capacity of the external finances to absorb shocks may be weaker than in the past.

Nonetheless, Fitch acknowledged that strong foreign interest in Malaysian government securities can further strengthen Malaysia’s sovereign funding conditions. “Malaysia’s large and liquid domestic debt capital market should limit the impact on the sovereign’s domestic financing costs in the event of a sharp reduction in foreign participation. The broader public sector holds 33% of marketable domestic government debt, further enhancing the stability of financing and funding flexibility.”

“Malaysia’s stronger and less volatile growth, and slower and less volatile inflation, compared with ‘A’ category peers, support the credit profile. The government’s structural reform plan for the economy has helped attract private-sector investment interest in 2011. However, given the political environment, Fitch believes implementation risk to the reform agenda remains material.” Fitch Ratings said.

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