KUALA LUMPUR (March 17): While Malaysian Rating Corp Bhd (MARC) expects Malaysia's short-term fiscal outlook to improve on better oil prices and the roll-out of Covid-19 vaccines, the rating agency said the negative rating pressure on the country will continue to build as many key issues remain unresolved.

In a note today, it said the pandemic has caused Malaysia's macro-financial vulnerabilities to spike, adding that this is also evident in many other economies, pointing to high household, corporate and public sector debts which were already present before the pandemic hit.

It said the country's unemployment rate rose to a level not seen in three decades, at 4.9% in January 2021.

The present low-rates, low-inflation environment is comforting, it said, although this is untenable in the short term.

MARC said the uneven recovery between sectors will affect long-term growth potential.

"The situation faced by some services-related industries, for example, the hotel industry, remains dire while export-oriented manufacturing has rebounded on improving external demand.

"We view a 'K-shaped' recovery as a distinct possibility. Job creation — a perennial issue — under this scenario will become an even bigger challenge," said the rating agency.

Meanwhile, it also highlighted the muted investment growth, which was also prevalent prior to the pandemic, with the recent political developments leaving investor confidence shaken.

Citing recent reports, MARC noted that several quality foreign direct investments had opted for other countries in the region rather than Malaysia.

"We see these lost opportunities, which we can ill-afford, hampering not only a high-productivity recovery but also the search for new sources of growth," it said.

The pandemic has multiplied the sense of urgency for the resolution of key issues in Malaysia, MARC said.

"Without a commitment to practical medium- to long-term policy solutions to tackle rising macro-financial vulnerabilities especially in a pandemic environment, we expect negative rating pressure to continue building up," it added.

Given the higher oil prices, there would be more fiscal room for Malaysia for another fiscal stimulus, MARC said, and that higher operating expenditure will lend temporary support to the struggling labour market and boost sluggish private consumption.

"We see the continuing search for new sources of government revenue and rising government debt to become even more urgent issues. While the pressure to reinstate the GST (goods and services tax) will rise, we do not expect it to happen given that it is not feasible politically, at least not within the present political mandate," the rating agency said.