Fitch affirms Malaysia's foreign, local currency issuer ratings

KUALA LUMPUR: Fitch Ratings affirmed Malaysia's long-term foreign and local currency issuer default ratings at 'A-' and 'A' respectively while the outlook for both ratings was stable, reflecting the country's track record of macroeconomic stability and strong net external creditor position.

It said on Wednesday the country ceiling and short-term foreign currency issuer default ratings were affirmed at 'A' and 'F2' respectively.

"However, deterioration in public debt ratios, low and energy-dependent revenues, as well as structural weaknesses such as low average incomes weigh on the credit profile," it said.

Fitch said that fiscal slippage or a lack of progress on fiscal reforms to reverse the deterioration in public debt ratios following the impending election could prompt negative rating action.

However, sustained political willingness to implement fiscal reforms, leading to a strengthening of the fiscal revenue base, improving budgetary flexibility and lessening the reliance on energy-linked revenues streams would support the ratings at their current level.

Additionally, the successful implementation of the government's structural reform package, which would push up the investment rate or a higher-trend GDP growth would be positive for the ratings.

"Malaysia's public finances are weak relative to those of its 'A' range peers. The rise in the federal government debt/GDP ratio and limited broadening of the fiscal revenue base have pushed Malaysia's debt/revenues ratio (246% in 2011) well above the 'A' and 'BBB' range medians (137% and 119% respectively)," it said.

Fitch said Malaysia was now on a par with more heavily indebted 'A' range sovereigns such as Italy (261%) and Israel (180%). Fitch also notes this deterioration in debt ratios had occurred despite strong GDP growth (2010-2012 average GDP growth 5.4%).

"Malaysia's public finances also exhibit structural weaknesses. General government revenues (24% of GDP in 2011) remain well below the 'A' range median for general government revenues (33%). Moreover, the share of petroleum-related revenues is high at 36% of federal government revenues," it said.

The ratings agency also pointed out Malaysia's fiscal flexibility was reduced by fuel subsidies in total expenditure (9% in 2011).

Fitch said reforms to address these vulnerabilities were unlikely until after a general election. As the reform was likely to be controversial, the ratings agency believed there was a risk of further delays regardless of the election outcome.

As for Malaysia's strong current account surplus, it expected it to persist, underpinning the solvency of the sovereign external balance sheet.

Malaysia maintained a net external creditor position (30% of GDP at end-2011) well above the 'A' range median of 16%. The sovereign also benefited from low external debt and interest service ratios relative to 'A' range peers.

However, a sharp increase in non-resident holdings of marketable domestically-issued medium- and long-term government debt (41% of foreign exchange reserves at end-June 2012, up from 21% at end-June 2008) suggests the capacity of the external finances to absorb shocks may be weaker than in the past.

Nonetheless, Fitch acknowledges that strong foreign interest in Malaysian government securities can further strengthen Malaysia's sovereign funding conditions.

Moreover, Malaysia's large and liquid domestic debt capital market should limit the impact on the sovereign's domestic financing costs in the event of a sharp reduction in foreign participation, it said. The broader public sector holds 33% of marketable domestic government debt, further enhancing the stability of financing and funding flexibility.

"Malaysia's stronger and less volatile growth, and slower and less volatile inflation, compared with 'A' category peers, support the credit profile.

“The government's structural reform plan for the economy has helped attract private-sector investment interest in 2011. However, given the political environment, Fitch believes implementation risk to the reform agenda remains material," it said.