Fitch says Malaysia’s budget revision highlights 'structural weaknesses'

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KUALA LUMPUR (Jan 21): Fitch Ratings maintained today its ‘negative’ outlook on Malaysia’s long-term issuer default ratings, which means it is more likely than not, to downgrade the ratings within the next 12-18 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 today.

It added 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%.

He also said the government had cut its 2015 GDP growth forecast to 4.5%-5.5%, from its original forecast of 5%-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 natural-gas products in south-east Asia, with petroleum accounting for roughly 30% of fiscal revenues,” Fitch noted, despite Najib’s assertion during his speech yesterday that Malaysia is a net importer, when factoring in overall petroleum products.

Fitch also reiterated it had previously noted that any slippage in the government’s fiscal targets would be credit negative for the country.

“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 O&G-linked revenues is a structural weakness for the sovereign,” it added.

On Tuesday, Najib had 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 a 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,” it said.

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

Despite the government’s assurance that fiscal reform and consolidation will continue, Fitch asserted further consolidation measures might be required to achieve balanced budget by 2020.

Additionally, Fitch said Malaysia’s rising contingent liabilities are likely to remain a credit weakness.

“The financial position of 1Malaysia Development Berhad (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 MYR5.8bn of the entity's MYR41.9 billion debt (at end-March 2014),” it added.

Fitch expects to conduct a full review on Malaysia’s ratings, before the end of July 2015.