KUALA LUMPUR (April 3): Malaysia’s relatively high government debt is partly offset by a favourable debt structure and large domestic savings, Moody’s Investors Service said yesterday as it affirmed its A3 credit profile for the country, with a stable rating outlook.

Its senior analyst for sovereign risk group, Anushka Shah said Malaysia’s high debt burden is a significant constraint on the rating.

“When we compare Malaysia’s debt ratio to those of other A-rated sovereigns, it is significantly higher. Given that deficit levels are not going to narrow substantially over the next few years, particularly in a weaker global environment, it is likely that the debt burden will remain elevated,” she said, noting the high debt burden has been a long-standing structural issue for Malaysia.

That said, she noted the country is not exposed to risks of tighter funding conditions given its favourable debt structure, whereby 98% of the Government’s debt burden is funded in local currency. As such, Malaysia is also protected, to a certain extent, from risks arising from currency fluctuations to its debt position.

“So we don’t see Malaysia as being particularly exposed if there are sudden shifts in funding conditions because it has not relied on external funding. It would be impacted, perhaps indirectly, through foreign investment participation in the capital markets and in trade flows in general. But I think that would be more of a confidence-driven issue related to flows rather than something that would spill over into fundamentals,” she told a media briefing on Moody’s credit outlook on Malaysia for 2019 today.

Malaysia’s government debt stood at 50.7% of gross domestic product in 2017, significantly higher than the median of 39.7% for A-rated sovereigns. This does not include government-guaranteed debt, which is Moody’s standardised definition of debt for its ratings calculations.

Anushka also observed that a large proportion of the local currency debt is held by large, stable, and long-term players domestic institutional investors such as the Employees Provident Fund and Kumpulan Wang Persaraan (Diperbadankan).

“This favourable debt profile reduces rollover risk and limits the impact of currency depreciation on Malaysia’s debt-servicing needs.”

But she also highlighted another fiscal constraint for Malaysia, which is the reliance on oil-related revenues which has increased over the course of the past year with the abolishment of the goods and services tax (GST). The sales and service tax (SST) — introduced to replace GST — only covers about half of the previous tax collected.

Morever, Malaysia’s dependance on oil-related revenue makes it more exposed to oil price fluctuations. “Essentially what we see is that an increased reliance on oil-related revenues narrows the Government’s fiscal flexibility. And it really limits their revenue base.  

“The debt affordability metrics, which is the ratio of interest payments to revenue, is the metric that we look at as part of our assessment of broader fiscal strength. Malaysia is much weaker in that aspect compared to other sovereigns at that rating level. That constraint will remain, and it is a persistent source of risk,” she said.

Nevertheless, Anushka assured that Malaysia is not exposed to any default risks. “On these metrics, Malaysia is weaker than certain other A-rated peers, but that does not mean that it doesn’t have the capacity to service its debts.”