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S&P Global lead analyst explains revision to outlook on Malaysian economy

01 Jul 2020 / 23:56 H.

PETALING JAYA: In light of S&P Global Ratings’ revised outlook on the Malaysian economy, the research firm’s Asia-Pacific sovereign & international public finance ratings director & lead analyst, Andrew Wood, explained that the impact of Malaysia’s current political situation has affected clarity in terms of policymaking, particularly on the fiscal side of things over the next two to three years.

“There could very well be some significant differences between the Pakatan Harapan (PH) aligned government might take versus a Perikatan Nasional aligned government, especially with regard to revenue-generating measures and those that might replace the zero-rated GST programme, over the next two years, especially when the economy recovers,” he said during its webinar, themed “Malaysia – Fiscal and Debt Risks Reflect Impact of Covid-19”, today.

The director said that is the impact S&P Global is seeing at the moment, and this is encapsulated in its negative outlook rating at present.

How it is going to turn out, Wood mused, remains very much to be seen.

“That will be important, in terms of the direction and trajectory of the rating for Malaysia in the next 12 to 18 months.”

Last week, S&P Global reaffirmed Malaysia’s A- rating but it revised its outlook on Malaysia to negative from stable, reflecting the heightened risks to the fiscal metrics due to the Covid-19 pandemic. On Tuesday, it revised its outlook on five Malaysian banks – Malayan Banking Bhd (Maybank), CIMB Bank Bhd, Public Bank Bhd, RHB Bank Bhd and AmBank (M) Bhd – to negative from stable.

It affirmed its ‘A-’ long-term and ‘A-2’ short-term issuer credit ratings on Maybank, CIMB Bank, and Public Bank, and its ‘BBB+’ long-term and ‘A-2’ short-term issuer credit ratings on RHB Bank and AmBank.

It said its action was based on the outlook revision on the sovereign credit ratings on Malaysia, as it expects these banks to continue to benefit from external support from the sovereign over the next 12 to 24 months.

Meanwhile, Wood reiterated that it is unlikely Malaysia risks running a twin deficit.

“In our forecast, the surplus will fall this year as it tends to do when oil & gas prices and palm oil prices are lower, and we’ll probably have that surplus somewhere between 1% and 2% of the country’s GDP as a fairly likely outcome,” he said

Wood said the country has a longstanding dynamic in which the government runs a fiscal deficit but the economy runs an external current account surplus.

Furthermore, the rating agency has projected a recovery in oil and gas prices over the next few years which will result in a gradual recovery in Malaysia’s trade.

“With the assumption that export and import volumes move in a way that we are expecting to, especially where export volumes recover quite strongly in 2021.”

However, the lead analyst acknowledged that there is still a possibility for the current account to slip into a deficit this year, but even if it were to happen it is likely to recover into a surplus position beyond that.

S&P Global has forecast a GDP contraction of 2% for the Malaysian economy, which its economist, Vishrut Rana, acknowledged is a bit higher than consensus estimates, but it is supported by the good progress in terms of containment and recovery activity observed in the country.

“The third quarter will play critical in terms of determining how the rest of the year plays out,” he explained.

“If there is some normalisation of activities during Q3 and households are more comfortable and going out spending, the number of new cases remains low, we could see growth coming in more towards our own forecast.”

Visruth pointed out that the risk to the recovery forecast hinged on a medical intervention being available by mid-2021 that will reduce the severity of the pandemic.

He also said that a return to growth will depend on a speedy recovery in the labour market, should the labour participation and employment rate remain subdued this could result in a drop in household income that will lead to reduced spending and growth of the economy.

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