This article first appeared in The Edge Financial Daily, on January 12, 2016.
KUALA LUMPUR: Moody’s Investors Service’s revision of Malaysia’s sovereign rating outlook from “positive” to “stable” is not a reason to hit the panic button just yet, say industry experts.
Moody’s said in a statement yesterday that while it affirms the Malaysian government’s issuer and senior unsecured bond ratings at “A3”, it is changing its outlook from “positive” to “stable”.
Similiarly, the rating agency also revised the outlook to “stable” for several government-linked companies, such as Tenaga Nasional Bhd, Telekom Malaysia Bhd, Malaysia Airports Holdings Bhd and Penerbangan Malaysia Bhd.
Etiqa Insurance and Takaful head of research Chris Eng said that the move by Moody’s should not be viewed too negatively.
“We have long anticipated that Moody’s will remove their ‘positive’ outlook for Malaysia’s sovereign rating to match their peers, Fitch Ratings and Standard & Poor’s. While this is not a positive development, it should also not be viewed too negatively as the outlook is set at ‘stable’, meaning the risk of a downgrade is small at this stage.
“That being said, the Malaysian government still needs to be cautious in managing its fiscal position. As long as the rating agencies perceive there is fiscal discipline towards an improving balance sheet in Malaysia, the risk of a downgrade is small at this juncture,” he told The Edge Financial Daily.
RHB Research Institute director and regional head of fixed income and currency research Ray Choy said that the outlook revision by Moody’s is secondary compared to the issue of rising costs of financing.
“Costs of financing may face some pressures since US interest rates are expected to continue rising this year. I see the outlook revision as secondary to the issue of financing costs, which affect emerging-market bonds as a whole and not just Malaysia,” said Choy.
According to Bloomberg, the ringgit extended losses after Moody’s rating revision, weakening by 0.5% to 4.4070 against the greenback as at mid-afternoon yesterday before ending the day on a more stable footing at 4.3853.
Minister in the Prime Minister’s Department Datuk Seri Abdul Wahid Omar was quoted by Bernama as saying that the revision by Moody’s is not a downgrade for Malaysia.
“It is a revision in the outlook that is reflecting the current global economic scenario,” he told Bernama.
Moody’s said that the key drivers of the outlook revision were the deterioration in Malaysia’s growth and external credit metrics, due to external pressures over the past year and macro financial risks posed by system-wide leverage, which remains high.
The rating agency also pointed out that despite progress in fiscal consolidation, it expects Malaysia’s public debt burden and debt affordability to see limited improvement over the outlook horizon.
It was reported that the government is expected to table a revised budget soon, given that oil prices have dropped to levels of US$33 (RM145.20) per barrel from the assumption of US$48 per barrel, on which the original budget was based upon.
Hong Leong Investment Bank Bhd economist Sia Ket Ee said that the government would be walking a fine line between reducing the fiscal deficit of 3.1% in 2016, and at the same time ensuring development expenditure is at a level acceptable to investors.
“All eyes will be on the revisions made. If the cuts are confined to operating expenditures then investors would be at ease, but if it affects development expenditure, this may further add to the negative sentiment stemming from falling oil prices and the slump in China’s economy.
“The fact that the ringgit stabilised to levels of 4.385 [from 4.4070 earlier] is an indication that investors are looking at the bigger picture and are aligning their focus on the revised budget, not just on the revised outlook by Moody’s,” he told The Edge Financial Daily.