Tuesday, July 28, 2015

S&P Reaffirms Malaysia's "A-" Rating, Stable Outlook

PETALING JAYA: Standard & Poor's Ratings Services (S&P) has reaffirmed Malaysia's long-term foreign currency sovereign credit rating at "A-", with a stable outlook, reflecting the country's country's strong external position and considerable monetary flexibility.

This comes a month after Fitch Ratings upgraded Malaysia's outlook to stable and maintained its credit rating at "A-" and just days after BNP Paribas had criticised Fitch on its Malaysia centric assessments. BNP Paribas had said that Malaysia is at risk of a "multi-notch downgrade" in sovereign credit rating due to the country's credit position.

S&P however stressed that the rating is based on the assumption that the political implications of 1Malaysia Development Bhd (1MDB) investigations will not interfere with sound policymaking. It believes that corruption allegations involving 1MDB will not impede current policy flexibility and responsiveness.

"We view Malaysia as having a high degree of monetary flexibility. The central bank's track record in controlling inflation indicates strong monetary flexibility that helps absorb major economic shocks," it said, adding that Malaysia has a deep domestic bond market, compared with its peers', which reduces its reliance on external financing.

S&P said the ratings are also underpinned by Malaysia's strong external position, a result of years of current account surpluses.

"We believe this position can withstand a slowdown in the oil and gas sector over the next two years. Likewise, external indicators are likely to remain unchanged, given our assumption of continued healthy trade surpluses," it noted.

It estimates average annual increase in general government debt at 2.9% of GDP over 2015-2018 versus an average of 6% over 2009 to 2012, and the country's budget deficit to narrow toward a balance by 2020.

S&P said the government's measures to cut petroleum subsidies and introduce goods and services tax (GST) will ease its debt burden.

S&P said Malaysia's general government fiscal position also carries contingent risks from its public enterprises and financial sector, which include guarantees on debts and letters of support.

"Within our forecast horizon, we do not believe such contingent liabilities will materialise significantly," it opined.

S&P said Malaysia's public enterprises have diverse financial profiles--some with strong free cash flows and sizeable liquid assets that, in the past, have been used to support other parts of the public sector.

Although the high household debt levels pose some risks, it believes that is somewhat contained by a banking sector that is well capitalized and has a good regulatory record.

"Our bank industry country risk assessment for Malaysia is "4", with "1" being the strongest assessment and "10" the weakest," it added.

S&P said Malaysia's capital market exposure to sudden funds outflow due to a sharp rise in holdings of ringgit-denominated Malaysia government securities to 28% as at end-2014 by non-residents, is contained by its expectation of continued sound policymaking, floating exchange rate, high foreign exchange reserves, the presence of large domestic institutional investors, and the deep local capital market.

For 2015, it expects a weaker ringgit to boost exports of manufactured goods, and partly offset the impact of lower oil prices on Malaysia's energy exports.

"We project Malaysia's average annual growth in real GDP per capita will be just under 4% over 2015-2018. We expect exports of manufactured goods and growth in private consumption and investment to drive this expansion," it said.

Meanwhile, secretary general of Treasury Tan Sri Mohd Irwan Serigar Abdullah said in a statement yesterday that the reaffirmation of Malaysia's A- sovereign credit rating by Fitch and S&P is a testament to the government's continuous effort in ensuring sound macroeconomic fundamentals and its commitment to strengthening public finances.

He stated that S&P has expressed confidence in Malaysia's responsive and effective policy making.

"In this regard, S&P believes that issues surrounding 1MDB will not hinder the government's resolve to pursue economic and fiscal reforms," he added.


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