KUALA LUMPUR (June 30): Fitch Ratings has revised the outlook on Malaysia’s sovereign rating to “stable” from “negative”, and affirmed the country’s long-term foreign currency Issuer Default Rating (IDR) at 'A-', with local currency IDR at 'A'.

The review is in sharp contrast with the market's expectation of a downgrade by as much as two notches on Malaysia’s credit rating, following its earlier remark in March on such a possibility because of worsening trade balance and a state investment company's struggles to meet its debt obligations. 

Fear of the downgrade has dampened the equity market sentiment and sent the ringgit to near ten-year low earlier this week.

In a statement released just before midnight, Fitch said Malaysia's fiscal finances have improved since last year with the general government deficit falling from 4.6% of gross domestic product (GDP) in 2013 to 3.8% of GDP in 2014, and general government debt to GDP ratio declining from 54.7% at end-2013 to 53.9% end-2014, as per Fitch estimates.

Fitch viewed the progress on the Goods and Services Tax (GST) and fuel subsidy reform as supportive of the country's fiscal finances. A further narrowing of the deficit is forecast in 2015, despite lower oil prices. 

“Nevertheless, as against the 'A' median, Malaysia's fiscal position continues to remain weak. General government debt as a share of GDP at the end of 2014 was 53.9%, which is still above the 'A' median of 47.2%,” Fitch noted.

The rating agency opined that Malaysia's rating remains supported by reasonably strong real GDP growth rates and low inflation volatility. Malaysia's five-year real GDP growth averaged 5.8% over 2010-14, as against 3.1% for the 'A' median, whereas inflation volatility was 1.3% as against 1.7%

Meanwhile, Fitch noted that federal government debt and explicit guarantees continue to increase. Total federal government explicit guarantees at end-2014 rose to 16% of GDP from 15.4% a year earlier. 

“Fitch continues to believe that the Malaysian sovereign is incurring additional contingent liabilities beyond explicit guarantees because of quasi-fiscal operations of state-owned entity 1MDB (1Malaysia Development Bhd). Fitch thinks there is a high probability that sovereign support for 1MDB would be forthcoming if needed,” the statement said.