KUALA LUMPUR (Jan 30): Moody’s Investor Service has today affirmed Malaysia’s bond and issuer ratings at A3, and said the outlook remains positive for the ratings.

It said the key drivers of its decision are: the government’s intention to adhere to its policy of deficit reduction and the resistance of Malaysia’s fundamental credit strengths — notably macroecnomic stability, domestic capital market depth and a favourable government debt structure — to global financial market volatility.

“We have seen on-going fiscal deficit reduction and actual implementation of significant reforms, [but] the external challenges faced by the country have risen. Consequently, Moody’s has affirmed Malaysia at A3 and maintains a positive outlook on the rating,” it added.

“The effectiveness of Malaysia's policy response in the year ahead, to challenges already evident — namely, lower global crude oil prices and lackluster global growth — and to those challenges that are expected — namely the normalisation of interest rates by the US Federal Reserve — will influence the future trajectory of Malaysia's sovereign rating,” it further opined.

It noted the government has set in place the necessary infrastructure to implement the Goods and Services Tax in April 2015. The new tax will bolster revenue over and above the sales and services taxes that it replaces, partly through improved compliance.

“Lower oil prices present potential downside risks to continued strong fiscal performance. The government's ability to continue to meet or exceed fiscal targets in a low oil price environment, will be a key consideration in lifting the sovereign's rating,” it said.

It noted the government has recently responded to the potential revenue impact from lower oil prices, by implementing cuts to operating expenditure, which it said demonstrated a commitment to fiscal consolidation and to meeting prevailing fiscal rules.

“However, the full impact of the oil market shock — and the potential for further shocks — will not be known for some time, because a significant proportion of hydrocarbon revenues are derived from liquefied natural gas, the price of which tends to adjust relatively slowly, owing to the long-term nature of supply contracts,” it noted.

Moody’s added it expects the stability of dividend payments by Petroliam Nasional Bhd (Petronas) and expenditure rationalisation to continue to keep the government’s operation balance in surplus, and its stock of debt under 55% of the gross domestic product (GDP).

It added that Bank Negara’s solid track record of maintaining low inflation and a stable financial system, continues to anchor the macroeconomic stability of the country.

“Continued fiscal consolidation, underpinned by relatively strong economic growth and favorable funding conditions for the government, potentially supports a higher rating level,” it said.

In conjunction, the credit rating agency has also affirmed the instrument ratings on senior unsecured debt, issued by Khazanah Nasional Bhd —  which is guaranteed by the government — at A3.