SINGAPORE (Sept 17): Moody's Investors Service says the economy of Malaysia (A3 positive outlook) posted strong growth in the first half of 2014, buoyed by private sector consumption and investment.

Higher prices for petroleum and other hydrocarbons have also aided exports and government revenue, but this trend also underscores the susceptibility of external and fiscal balances to commodity prices.

At the same time, contingent risks to the government have continued to build, in part represented by the persistent rise in government-guaranteed debt.

Moody's conclusions were contained in its just-released credit analysis on Malaysia. The report looks at the country's credit profile in terms of Economic Strength (assessed as "high (+)"), Institutional Strength ("high"), Fiscal Strength ("high (-)"), and Susceptibility to Event Risk ("low").

The Moody's report notes that the Malaysian government kicked off its fiscal reform programme in 2013, prompting a revision of the outlook on the A3 sovereign rating to positive, from stable last November.

Despite the drag on growth from fiscal consolidation, the Malaysian economy performed strongly in the first half of 2014, with real GDP growth averaging 6.3% year-on-year over this period, higher than all other major countries in the Asia-Pacific other than China.

The report further notes the current account surplus and ample onshore liquidity remain intact and serve as buffers to potential external financial shocks.

While the share of non-resident participation in domestic government bond markets continues to rise, the potential for interest rate volatility in the event of an outflow, is mitigated by the presence of large domestic institutional investors as reliable sources of funding for the government.

The report further notes that Malaysia's financial system continues to provide sound institutional and liquidity support, while its capital structure and funding base, pose very low contingent risk to the sovereign.

The Moody's report says the most prominent risk to financial stability is the rise in household indebtedness, which stood at 86.8% of GDP at the end of 2013 — higher than other developing countries in the region, such as India, Indonesia and Thailand.