Fitch: Malaysia’s rating kept at ‘A-’ with stable outlook

This article first appeared in The Edge Financial Daily, on August 18, 2017.
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KUALA LUMPUR: Fitch Ratings has affirmed Malaysia’s long-term foreign- and local-currency issuer default ratings at ‘A-’ with a stable outlook.

In a statement yesterday, Fitch said that Malaysia’s ‘A-’ rating is supported by strong gross domestic product (GDP) growth compared with the median of ‘A’ category peers, sustained current account surpluses and the country’s net external creditor position.

However, Fitch noted that the rating remains constrained by some structural metrics including per capita GDP and governance indicators that are weaker than the ‘A’ median.

Fitch noted that Malaysia’s per capita GDP at end-2017 is projected at US$9,815 (RM42,160) against US$19,955 for the peer median, while weaker governance is highlighted by issues related to 1Malaysia Development Bhd, which remains the subject of international investigation over embezzlement charges.

The rating agency also noted that a general election, scheduled to be held before August 2018, is unlikely to lead to a significant change in the direction of economic policy.

Other constraints on the rating include government debt that is somewhat higher than peers and which could be affected by sizeable contingent liabilities.

Fitch noted that explicit federal government guarantees amounted to 15.2% of GDP at end-2016.

In addition, the agency said there are lingering risks that the sovereign balance sheet could be affected by the liabilities of 1MDB and external financing of certain infrastructure projects. Fitch estimates an average five-year real GDP growth of 5% for Malaysia, well above the ‘A’ category median of 2.9%. It said that Malaysia’s growth momentum has gained pace in 2017, and the agency had raised its full-year GDP growth forecast to 5.1%, from 4.5% previously.

Bank Negara Malaysia’s (BNM) monetary policies, according to Fitch, have been effective in keeping inflation contained. The agency is forecasting inflation of 3.5% for 2017 as the base effect from low commodity prices eases.

Fitch expects the target for a federal government deficit of 3% of GDP in 2017 to be achievable, with a slight further narrowing in the next two years.

It expects federal government debt to stabilise at around 52% of GDP in 2017 and 2018, below the authorities’ self-imposed debt ceiling of 55% but moderately above the ‘A’ median of around 49%.

Fitch said that international reserves relative to Malaysia’s short-term external debt remain relatively low at just over 100%, although the reserve coverage of current external payments, at around 5.1 months, is in line with peers.

The agency expects the current account to remain in surplus at almost 2% of GDP over the forecast period as a resilient export performance is forecast to counter strong import growth associated with capital goods related to infrastructure projects.