KUALA LUMPUR: Standard & Poor’s Financial Services LLC (S&P) affirmed Malaysia’s short-term foreign currency sovereign credit rating at ‘A-2’ and its long-term rating at ‘A-’, with a stable outlook on the long-term rating, as it expects the fall in oil prices will not disrupt Malaysia’s long-term fiscal consolidation.

“We believe the economy can withstand some weakness in the energy sector owing to its fairly diversified and broad-based growth,” said S&P in a statement yesterday.

Based on that, it also affirmed its long-term ‘A’ and short-term ‘A-1’ local currency ratings on Malaysia, as well as its ‘axAAA/axA-1+’ Asean regional scale rating on Malaysia.

“In our view, the decline in oil prices has a moderate negative impact on Malaysia’s fiscal position, given that government revenue has a high dependence on the energy sector,” said S&P.

It also noted that it has lowered its oil price assumptions — it expects Brent oil prices to average US$55 (RM195.80) per barrel in 2015 and US$70 per barrel in 2015-2018.

“However, we believe the decline in oil prices will not derail Malaysia’s long-term fiscal consolidation efforts. The country’s strong external position can absorb some weakness in the oil and gas sector,” it added.

S&P also commended the Malaysian government for having been proactive in mitigating the fallout of the slump in oil prices, and expects Malaysia to maintain its long-term target to balance the federal budget by 2020.

“Malaysia’s strong external position, a result of years of current account surpluses, underpins the ratings,” the ratings agency stressed.

S&P also noted that Malaysia has a high degree of monetary flexibility, and that its central bank’s track record in controlling inflation indicates strong monetary flexibility that attenuates major economic shocks.

“Malaysia also has a deep domestic bond market, compared with most of its peers, which reduces its reliance on external financing,” it added.

However, S&P cautioned that the continuing increase in contingent liabilities and other forms of off-budget financial support could offset the benefits of its fiscal consolidation efforts.

“We view the government’s guarantees on debts (including letters of support such as that behind the US$3 billion bond issued by 1Malaysia Development Bhd) as direct commercial financial obligations of the government should these entities fail to pay,” it remarked.

Moving forward, S&P said it would raise Malaysia’s ratings should Malaysia be able to further reduce its deficits and deliver stronger economic growth.

This article first appeared in The Edge Financial Daily, on February 11, 2015.