Fitch affirms Malaysia at 'A-' with stable outlook

PETALING JAYA: Fitch Ratings has affirmed Malaysia’s long-term foreign- and local-currency issuer default ratings (IDRs) at ‘A-’ with a stable outlook, supported by strong gross domestic product (GDP) growth.
The rating agency said in a statement yesterday that Malaysia’s GDP growth is strong compared with the median of ‘A’ category peers. The rating is also supported by sustained current account surpluses and Malaysia’s net external creditor position.
“However, the rating remains constrained by some structural metrics, including per capita GDP and governance indicators, that are weaker than the ‘A’ median, and government debt that is somewhat higher than peers’ and could be affected by sizeable contingent liabilities,” it said.
Fitch estimates average five-year real GDP growth of 5% for Malaysia, well above the ‘A’ category median of 2.9%, noting the resilient economic performance over the past two years despite several challenges, including lower oil prices and volatile capital flows.
With growth momentum gaining pace this year, Fitch has raised its full-year GDP growth forecast for Malaysia to 5.1% from 4.5% previously. Private consumption spending received a boost this year from a 15% increase in cash transfers under BR1M, while exports have strengthened.
Fitch said Bank Negara Malaysia’s (BNM) monetary policies have been effective in keeping inflation contained.
“Although inflation rose to an average of around 4.1% in 1H2017, this was caused by base effects from very low commodity prices a year earlier. We forecast inflation of 3.5% in 2017 as the base effect eases,” it said.
Fitch said the government managed to contain the impact of falling oil prices on the budget deficit and expects the targeted deficit of 3% of GDP to be achieved this year, with a slight further narrowing in the next two years. This will result in federal government debt stabilising at 52% of GDP in 2017 and 2018, below the self-imposed debt ceiling of 55% but moderately above the ‘A’ median of around 49%.
Fitch continues to view contingent liabilities as a risk to public finances with explicit federal government guarantees amounting to 15.2% of GDP at end-2016.

“In addition, there are lingering risks that the sovereign balance sheet could be affected by the liabilities of state-owned fund 1Malaysia Development Bhd (1MDB) and external financing of certain infrastructure projects,” it said.
The rating agency said BNM’s willingness to allow the currency exchange rate to fluctuate in response to external factors over the past few years has cushioned the country’s external finances and noted BNM’s efforts in trying to manage ringgit volatility towards end-2016.
During the seven months through July 2017, BNM accumulated close to US$5 billion (RM21.45 billion) in reserves. International reserves relative to Malaysia’s short-term external debt remain relatively low at just over 100%.
Reserve coverage of current external payments, at around 5.1 months, is in line with peers’ and Malaysia’s external account remains in a net external creditor position, supported by large private external assets.
“We expect the current account to remain in surplus at almost 2% of GDP over the forecast period as resilient export performance is forecast to counter strong import growth associated with capital goods related to infrastructure projects,” said Fitch.
Malaysia scores below the ‘A’ category median on per capita GDP, standards of human development and governance. Per capita GDP at end-2017 is projected at US$9,815 against US$19,955 for the peer median.
“A general election is scheduled to be held before August 2018 but is unlikely, in Fitch’s view, to lead to a significant change in the direction of economic policy,” it said.
Malaysian banks’ asset quality and capitalisation levels remain reasonably healthy while household debt levels are high at 86.7% of GDP in 1Q 2017. However, reasonably strong employment and income growth counter some of the risk for the banking sector from high household debt.