Fitch affirms Malaysia at A-

PETALING JAYA: Fitch Ratings has affirmed Malaysia's long-term foreign-currency issuer default rating (IDR) at 'A-' with a stable outlook, citing solid economic growth and a net external creditor position built up from a record of current-account surpluses.
“These strengths are offset by elevated government and private sector debt, and low per capita income and World Bank governance scores relative to rating peers. The affirmation not only takes into consideration measures such as the rollback of the goods and services tax (GST), but also the stated intention to reduce fiscal deficits and improve governance,” it said in a statement today.

The agency raised its estimate of central government debt at end-2017 to around 65% of gross domestic product (GDP), from 50.8%. This follows the government’s recognition that it will need to service a larger share of explicitly guaranteed debt.
“The Pakatan Harapan coalition, which won the May 2018 election, has moved ahead on many of its key election promises, notably repealing the GST. It also plans to continue fuel subsidies in place since early 2018, although they will be made more targeted,” it said.
Fitch, which views these measures as negative for the credit profile, noted that the government aims to implement offsetting fiscal measures and has indicated its intention to contain the central government deficit.
The risks to achieving this target includes lower-than-Fitch-expected growth, which could limit room for expenditure cutbacks, as well as delays in implementing planned revenue measures.
“We expect the deficit to continue falling to around 2.5% of GDP by 2020 under our baseline assumptions through a combination of subsidy rationalisation, further capital spending cuts, new revenue measures and better tax compliance.
“Central government debt is likely to decline to around 59% of GDP by 2020, although the decline could be more rapid if the government chooses to sell off public assets and use the proceeds for debt reduction,” said Fitch.
While more details on these measures could be announced in Budget 2019, there are also upside risks to debt as a part of contingent liabilities related to public-private partnerships of 14.9% of GDP may migrate to the sovereign balance sheet.
According to Fitch, Malaysia’s structural indicators such as GDP per capita, standards of human development and governance remain below the ‘A’ category median.
“One of Pakatan Harapan coalition's notable campaign promises was a royal commission inquiry into recent corruption scandals, such as that surrounding the state investment fund, 1Malaysia Development Bhd,” it said, adding that the investigation could help raise governance standards over time, although improvements may take time.
The agency expects GDP growth to slow to 5.2% in 2018, 4.8% in 2019 and 4.6% in 2020, from 5.9% in 2017 as the government seeks to constrain recurrent spending in line with its narrower revenue base.
In addition, public capital spending is being held back by a review of large infrastructure projects, and exports are likely to moderate from slowing external demand.
“However, Malaysia's average GDP growth for the five years to 2018 will remain above peer medians. Downside risks to our growth projections could materialise from accelerated spending cuts, disruption to capital projects or slowing investment in the event of prolonged policy and political uncertainty.”
Fitch also expects the central bank to limit its intervention and allow sufficient currency flexibility to preserve foreign-exchange reserves at a reasonably healthy level of around five months of current external payments.
Meanwhile, current account surplus is expected to remain between 3-4% of GDP between 2018 and 2020, supported by higher oil-related exports and slightly slower import growth. Imports are likely to slow from the new government's review of major infrastructure projects.
Fitch said Malaysia remains vulnerable to negative external developments, such as rising trade protectionism, due to its trade openness.
It is also vulnerable to shifts in external investor sentiment due to high levels of short-term external debt and foreign holdings of government debt, especially against the backdrop of rising US interest rates.