KUALA LUMPUR (July 1): Fitch Rating's move to upgrade its outlook on Malaysia's government debt to stable from negative, will augur well for the ringgit and local capital markets in the near term, according to economists.

This is because the upgrade came as a surprise to investors who had generally anticipated a downgrade earlier, economists said.
 
MIDF Amanah Investment Bank Bhd wrote in its economic note today, “the review is in sharp contrast to 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."

"This is positive for ringgit, which we have highlighted earlier as the only supporting factor for ringgit in the near-term, although we have not been anticipating any downgrade from the rating agency. The move to upgrade our outlook from “Negative” to “Stable” is a bonus factor," MIDF said.

Fitch said in a statement that it had maintained Malaysia’s long-term foreign currency issuer default rating (IDR) at ‘A-‘ and local currency IDR at ‘A’.

According to Fitch, it has also revised the long-term IDRs' outlook to stable, from negative. Fitch said it had taken into account the nation's improving financials and economic growth.

Meanwhile, Hong Leong Investment Bank economist Sia Ket Ee said Fitch's upgrade could offset negative sentiment from Greece's debt default.

In a note today, Sia said the upgrade might be among factors that could help the ringgit strengthen to 3.55 in the second half of this year (2H2015). At the time of writing, the ringgit had strengthened to 3.7388 against the US dollar.

"Notwithstanding global market’s attention on development in Greece, we expect upgrade by Fitch to provide some catalyst to [the] ringgit and [to] capital markets.

"We  maintain MYR range forecast at RM3.55-4.00/US$ for 2H2015, with a mid-point forecast of RM3.70/US$," Hong Leong said.