FITCH Ratings has affirmed Malaysia’s long-term foreign-currency issuer default rating at A- with a stable outlook.
The A- rating reflects higher growth rates than the peer median, and a net external creditor position supported by steady current account surpluses and large external assets.
However, the rating is constrained by high government debt, low per capita income levels and weak standards of governance relative to rating peers, said the rating agency in a statement.
Pakatan Harapan moved swiftly to implement many key election promises upon taking office last May, most notably repealing the goods and services tax and reviewing numerous infrastructure projects.
“The budget’s medium-term fiscal targets are less ambitious than those of the previous government, due in large part to anticipated net revenue loss of around 1% of gross domestic product from the removal of GST and its replacement with the sales and services tax,” said Fitch.
Wider deficits and debt levels are negative for the credit profile, but are offset somewhat by steps announced in the budget to improve fiscal transparency and public debt management.
The Budget 2018 deficit target was revised up to 3.7% of GDP from 2.8% previously, taking into account one-off tax refunds and expenditure items that were previously off-budget, adding up to around 1.4% of GDP.
The authorities subsequently met the revised 2018 deficit target, supported by higher-than-expected SST collections that offset lower corporate income tax collection.
Meanwhile, Budget 2019 targets a deficit of 3.4% of GDP this year and 3% next year.
The authorities expect to meet their 2019 deficit target through higher dividends from Petronas (A-/stable) and additional revenue measures, including higher property taxes and an increase in stamp duty, as well as the introduction of a departure tax.
Fitch said it sees downside risks to the 2019 deficit target.
In particular, Budget 2019 is based on an optimistic oil price assumption of US$70 (RM280) per barrel, above Fitch’s forecast of US$65.
The budget is also based on the implementation of additional revenue-raising measures that may face political constraints, and on optimistic growth assumptions.
However, the agency said, it assumes that expenditure cutbacks will offset any revenue shortfall, and forecasts a general government deficit of 3.4% of GDP this year (current A median, -1.7%), in line with the authorities’ target.
Substantial non-oil revenue measures will be required for the government to meet its medium-term deficit targets unless oil prices recover, posing a risk to the fiscal outlook, said Fitch.
It forecasts general government debt to GDP to stabilise around 62% this year and next, above the current peer median of 49%.
“Our debt numbers include officially reported, committed government guarantees. Beyond the fiscal risks outlined above, there are risks to debt containment from contingent liabilities related to public-private partnerships, which may migrate to the sovereign balance sheet as the government continues to improve the transparency of public finances.”
Fitch said it expects growth to slow to around 4.5% this year and next, from 4.7% last year, on weaker export performance and slowing investment activity, but to remain above peers.
Five-year-average GDP growth at end-2018 was 5.2% against a current peer median of 3.3%.
The outlook for exports is uncertain because of trade tensions between the US and China, and Fitch’s expectations of low oil prices.
However, the agency believes that private consumption is likely to remain supportive of growth due to favourable labour market conditions, and the government’s plans to disburse income tax and GST refunds amounting to RM37 billion – 2.5% of GDP – during the year.
“The growth outlook is subject to downside risks as elsewhere in the region, from the slowdown in China and a further escalation of trade tensions with the US.”
The current account surplus declined to 2.3% of GDP last year from 3% in 2017 on weaker exports of electronics and commodities.
“We expect the current account surplus to narrow further in 2019 as demand for key exports, such as electronics, oil and liquefied natural gas, is likely to stay weak. Sustained current account surpluses have helped Malaysia retain its net external creditor position – estimated at 14.2% of GDP at end-2018, compared with a net debtor position of 16.8% for current rating peers – which is a strength for its credit profile.”
Fitch said Malaysia is vulnerable to shifts in external investor sentiment because of high short-term external debt, high foreign holdings of government debt and an international liquidity ratio that is just over 100%.
Foreign-currency reserves fell last year to US$101.4 billion (4.8 months of current external payments, current peer median at 4.3 months) as Bank Negara Malaysia intervened during the year to dampen depreciation pressures. Reserves have picked up subsequently as pressures on emerging markets subsided.
Structural metrics, such as GDP per capita, and standards of human development and governance remain below A category medians.
Among PH’s key campaign promises was to set up a royal commission of inquiry into corruption scandals, and to further improve the transparency of public finances. These measures will bode well for transparency and governance, although the improvements may take time to materialise.
“We forecast the banking sector’s performance to remain broadly stable despite some softening in growth and pockets of asset-quality risk in some sectors. Profitability among Fitch-rated banks should hold up well, and bank balance sheets should remain generally sound, which should help the sector weather unexpected shocks.”
The sector’s common-equity tier 1 ratio and liquidity coverage ratio of 13.1% and 143%, respectively, at end-2018 indicated healthy capital and liquidity positions in aggregate, said Fitch.