KUALA LUMPUR (July 18): International credit rating agency Fitch Ratings has affirmed Malaysia's long-term foreign-currency issuer default rating (IDR) at 'A-' with a stable outlook, but cautioned that the country's weak fiscal position weighs on the credit profile.

The key rating drivers were Malaysia's strong and broad-based medium-term growth with a diversified export base, Fitch Ratings said in a statement today, but pointed out the rating drivers were weighed down by high public debt and some lagging structural factors, such as weak governance indicators relative to peers.

"The latter may gradually improve with ongoing government efforts to enhance transparency and address high-profile corruption cases," it said.

Fitch opined that the government's repeal of the goods and services tax (GST) and replacement with the sales and service tax (SST) soon after it took power has undermined its own fiscal consolidation efforts. "A weak fiscal position relative to peers weighs on the credit profile."

Moreover, it added political pressures and growth headwinds could motivate the government to increase its current spending. "But we believe that if it does so, it would seek additional revenues or asset sales to contain the associated rises in the deficit and public debt."

Fitch estimates general government debt to gradually decrease from 62.5% of GDP in 2019 to 59.3% in 2021.

Interestingly, Fitch said the greater clarity provided by the government last year on contingent liabilities has negatively influenced the debt ratios although this is partly offset by the improved fiscal transparency.

"Significant asset sales, as intended by the government, could result in a swifter decline in the debt stock than we forecast in our base case."

Fitch said Malaysia's well-diversified export base will help cushion the impact from a potential fall in demand in specific sectors as it expects the country's economic growth to slightly decelerate for the rest of the year as a result of a worsening external environment, but to hold up well at 4.4% in 2019 and 4.5% in 2020.

"Global trade tensions are likely to have a detrimental effect on Malaysia's economy, as with many other countries, but this may be partially offset by near-term mitigating factors, such as trade diversion, in particular towards the electronics sector," it said.

On institutional reforms, Fitch said the improved governance standards through stronger checks and balances, and greater transparency and accountability would strengthen Malaysia's business environment and credit profile.

"An important change is that all public projects are now being tendered, which increases transparency, creates a level-playing field and should bring down project costs. Prosecution of high-profile cases may also help reduce corruption levels over time."

On monetary policy, Fitch expects Bank Negara Malaysia will likely remain supportive of economic activity, especially since it has reduced the policy rate by 25 basis points to 3% last May.

Looking ahead, Fitch expects another 25 basis points rate cut in 2020 on the back of continued external and domestic uncertainty.

At the same time, Fitch observed that Malaysia's banking sector fundamentals remain broadly stable. It said the elevated but slightly declining household debt at 83% of GDP and property-sector weakness should be manageable for the sector, but present a downside risk in case of a major economic shock.

"The sector's healthy capital and liquidity buffers, as indicated by the common equity Tier 1 ratio of 13.4% and liquidity coverage ratio of 155% at end-May 2019, help to underpin its resilience in times of stress," it added.