Malaysia's economy has stabilised amid falling government revenue: Moody's

PETALING JAYA: Malaysia’s A3 issuer rating and stable outlook indicates a resilient economy against structural fiscal challenges posed by the trend deterioration in revenue, as well as signs of weakening institutional strength, according to Moody’s Investors Service.
In its just-released credit analysis titled “Government of Malaysia — A3 Stable”, Moody’s said the country should achieve robust gross domestic product (GDP) growth of 4.3% in 2017-18 and continued current account surpluses.
While the rating agency sees limited support to growth from either fiscal or monetary policy going forward, it said the drag from external trade seems to have bottomed out, in line with a recent pick-up in exports across Asia Pacific.
The determination of a sovereign’s government bond rating is based on the consideration of four rating factors including economic, institutional and fiscal strength, as well as susceptibility to event risk.
Moody’s pointed out that the Malaysian government has demonstrated its commitment to fiscal consolidation, with seven consecutive years (2010-2016) of narrowing fiscal deficits, involving a curtailment of expenditure to offset the continued weakness in revenue generation.
“The country’s debt burden likely peaked in 2015, registering just under 55% of GDP, although debt affordability has continued to worsen. Meanwhile, reform momentum has stalled and Moody’s does not expect any significant change before the next elections due by May 2018,” it said.

Moody’s believes that Malaysia will likely not meet its medium-term goal of a balanced budget by 2020 in the absence of major revenue reform.
The rating agency said factors that could prompt a positive rating action include a greater convergence in government debt metrics with similarly rated peers, accompanied by improvements in debt affordability and a reduction in the fiscal deficit.
“Conversely, a negative rating action could result from a significant worsening in Malaysia’s debt dynamics or fiscal accounts, or an inability to manage the impact of external shocks on the real economy or the financial system.
“The crystallisation of large contingent liabilities and an even greater deterioration in the balance of payments could also exert downward pressure on the rating,” it added.
Commenting on external stability, Moody’s said the stability in Malaysia’s foreign currency reserves belies currency and capital flow volatility, adding although reserve adequacy has improved slightly, it is still comparatively worse relative to Malaysia’s A-rated peers.
It noted that the longer-term outlook for Malaysia’s growth is clouded by the decision of the US to withdraw its participation from the Trans-Pacific Partnership Agreement.
“Specifically, the boost to competitiveness from reform and improved market access to the US would have been an important part of attracting higher value-added investments that would have helped Malaysia escape the ‘middle income trap’,” it explained, adding that Malaysia’s goal of achieving “high income” status as per the World Bank’s gross national income (GNI) per capita threshold of US$12,475 (RM55,264) by 2020 has become more challenging.
Malaysia’s GNI per capita measured US$9,096 in 2016.