Fitch: Budget revision highlights structural weaknesses

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KUALA LUMPUR: Fitch Ratings has maintained its negative outlook on Malaysia’s long-term issuer default ratings, which means it is more likely than not to downgrade the country’s ratings within the next 12 to 18 months.

“The upward revision to Malaysia’s 2015 fiscal deficit target amid sharply falling crude oil prices shows that the country’s dependence on petroleum-linked revenues remains a key sovereign credit weakness,” Fitch said in a press statement yesterday.

It also noted that Malaysia’s external liquidity has already weakened and that official reserves have declined 12% or US$16 billion (RM57.92 billion) between August and December 2014.

Additionally, the international ratings agency said Malaysia’s rising contingent liabilities are likely to remain a credit weakness.

“The financial position of 1Malaysia Development Bhd (1MDB), a state-owned investment company, has become a source of uncertainty. Fitch views 1MDB as a close contingent liability of the sovereign, because of the nature of its operations and leadership, as well as explicit sovereign guarantees of some RM5.8 billion of the entity’s RM41.9 billion debt (as at end-March 2014),” it said.

It added that it expects to conduct a full review of Malaysia’s ratings before the end of July this year.

Yesterday, Prime Minister Datuk Seri Najib Razak announced that 2015’s fiscal deficit target will be raised to 3.2% of gross domestic product (GDP) from 3%; the government’s GDP growth forecast was also cut to 4.5% to 5.5% from 5% to 6%.

“These revisions underscore the vulnerability of Malaysia’s economy and credit profile to sharp movements in commodity prices. The high share of revenues linked to oil- and gas-linked revenues is a structural weakness for the sovereign,” Fitch said.

The ratings agency noted that Malaysia’s macroeconomic outlook has deteriorated after international oil prices had plummeted more than 50% since June 2014.

“The country is the largest net exporter of petroleum and naturalgas products in Southeast Asia, with petroleum accounting for roughly 30% of fiscal revenues,” Fitch noted, despite Najib’s assertion in his speech yesterday that Malaysia is a net importer when factoring in overall petroleum products.

Najib had also stressed that the current account would remain in surplus in 2015, but Fitch is wary of downside risks to that surplus due to the sharp decline in energy prices which may result in a twin deficit situation.

“The emergence of twin fiscal and current account deficits will remain a rating sensitivity for Malaysia. Such a scenario would risk greater volatility in capital flows to a degree that could become disruptive for the economy,” said Fitch.

 

 

This article first appeared in The Edge Financial Daily, on January 22, 2015.