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This article first appeared in The Edge Financial Daily on March 22, 2018

KUALA LUMPUR: A change in the federal government poses little risk to Malaysia’s A3-Stable rating so long as long-term policies are not disrupted, according to Moody’s Investors Service.

Sovereign risk group assistant vice-president Anushka Shah said of greater significance are the implications a change in government could have on policies, including fiscal policies — currently an important determinant of Malaysia’s sovereign rating.

Commenting on the impending 14th general election, she told a media roundtable yesterday that Moody’s would consider it “business as usual” even assuming there was a change in the federal government which has been helmed by the ruling coalition Barisan Nasional since independence in 1957. Malaysia must hold a general election by August this year and political pundits believe Parliament could be dissolved by the end of March.

Anushka said Moody’s considers Malaysia’s domestic politics to be “a low source of event risk vulnerability to the sovereign’s fundamentals”.

“And one reason for that is that through electoral cycles in the past, we have seen that the government has maintained its fiscal deficit reduction path, and in general has been committed to a broader policy reform agenda and that is irrespective of what’s happening on the domestic political front.

“The reform agenda does appear to be going ahead despite political happenings or events. So we don’t view it as a risk to the sovereign’s broader fiscal spend.”

She indicated the rating was more likely to be affected, “only in the event that there are fundamental changes in policies such as fiscal policies that will determine how the rating would move”.

Moody’s has maintained Malaysia’s rating at A3-Stable despite a debt-to-gross domestic product (GDP) ratio of 50.9% as at end-June 2017 compared with the median 40.5% among A-rated nations.

Anushka said it was because of the country’s strong growth trend, a diverse and competitive economic structure that is backed by ample natural resources.

Risks from its high debt are also lessened because almost all of it is ringgit-denominated.

“When you look at the debt profile, we find that almost all the debt — about 97% — is funded in the local currency and that acts as a mitigating factor in the event there is a currency or interest rate shock.”

On the other hand, touching on the nation’s foreign exchange (forex) reserves adequacy, she observed the improvement in forex reserves, which breached the US$100 billion (RM392 billion) mark last year, is still insufficient relative to the nation’s maturing debt obligations.

“In this regard, Malaysia indicates to us that maturing debt obligations are larger than the stock of reserves simply because of certain peculiarities, I should say, in the external debt profile,” she said.

“You have a large component of external debt, and that means that debt obligations each year are quite sizeable. They are larger than the stock of reserves. So I guess that’s a vulnerability on the external account that we take into consideration when we look at Malaysia’s profile.”

She was less concerned about Malaysia’s elevated contingency liabilities, which ballooned to 16.9% of GDP as at end-September last year, seeing little risk to its rating.

Moody’s sees a low probability of debt crystallisation on financing incurred by government-linked companies (GLCs) that have received letters of support or guarantees from the government, even though Anushka said these have “increased at a fairly rapid rate” over the past few years.

“I think more broadly speaking, the government uses these guarantees as a sort of tool to leverage on its ability to raise finances without actually taking on debt in its own books,” she said.

“We find that they (the government) have adopted quite rigorous selection criteria when they grant these guarantees. They are granted to companies that are relatively healthy and [that] have strong balance sheets, so the probability of debt crystallisation at this stage is quite low.

“In fact when you look at GLCs that are rated by Moody’s, they all carry investment-grade ratings.”

On controversial state development fund 1Malaysia Development Bhd (1MDB), she stated: “As far as 1MDB is concerned, we think the debt consolidation plan has sort of proceeded as normal. What we do look at is the stock of [government-]guaranteed debt, and the implications that they have on the sovereign.”

Of 1MDB’s RM31 billion outstanding debt, only one bond of RM5.3 billion is government-backed.

“There is also another US$1.75 billion bond that has a Letter of Comfort from the government,” she observed, adding, “so those are the risks that we will take into consideration, but at this point the probability of 1MDB’s debt crystallisation is low.”

There has been a big jump in government-guaranteed debt over the years owing to increased state backing for bonds issued by GLCs. The ministry of finance has been guaranteeing bonds by issuing Letters of Guarantee, Comfort Letters or Letters of Undertaking.

Although the last two categories are generally regarded to have fewer implications for the government in the event of a default, some contend Putrajaya would still be bound by its commitments.

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