S&P affirms ratings on Malaysia with stable outlook; reforms effort to continue

S&P affirms ratings on Malaysia with stable outlook; reforms effort to continue
Business & Markets 2013
Written by Bernama
Friday, 26 July 2013 19:50

KUALA LUMPUR (July 26): Standard & Poor's Rating Servics (S&P) today affirmed sovereign credit ratings on Malaysia with a stable outlook, which reflects the country's strong external liquidity position, open and competitive middle-income economy, and considerable monetary flexibility.

These strengths are weighed against sticky fiscal deficits and an increasing government debt burden.

The rating agency today affirmed its 'A-' long-term and 'A-2' short-term foreign currency sovereign credit rating on Malaysia and also affirmed its 'A' long-term and 'A-1' short-term local currency sovereign credit rating on the country.

S&P's also affirmed its Asean regional scale rating on Malaysia at 'axAAA/axA-1+'.

The country has a net external asset position of about eight per cent of gross domestic product (GDP), based largely on continuing, albeit declining, trade surpluses. Official reserves cover about six months of current account payments.

"We estimate official reserves, financial sector external assets, and government liquid external assets to exceed gross external debt by 10 per cent of current account receipts at the end of the year.

"Although S&P foresees smaller current account surpluses over the next two to three years, due to higher imports of capital goods and sluggish commodity prices, we expect Malaysia to remain a net external creditor," credit analyst Phua Yee Farn said in a statement today.

Malaysia's economic policies have generally been pragmatic and the government's efforts to enhance transparency and corporate governance have improved the country's business environment, he said.

He said although the oil and gas sector has been a mainstay of the economy (around 20 per cent of GDP), the economy is fairly diversified with a competitive manufacturing and services base.

The central bank's record in controlling inflation, with its clear monetary objectives and independence, 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.

"In our view, Malaysia's slow fiscal consolidation to date stems from an inability to substantially reduce high subsidies and its relatively weak revenue structure; the government has a strong dependence on petroleum-related revenues.

"It plans to reform the subsidy system and introduce a goods and services tax (GST), which will hasten fiscal consolidation if implemented," Phua added.

The stable outlook balances Malaysia's strong external position and monetary flexibility with its somewhat weak fiscal performance.

The rating agency might raise the sovereign credit ratings if stronger growth and the government's effort to reduce spending result in lower-than-expected deficits, as indicated in the 10th Malaysia Plan.

With lower deficits, a significant reduction in government debt is possible, the analyst said.

"We may lower the ratings if the government fails to deliver reform measures to reduce its fiscal deficits and increase the country's growth prospects.

"These reforms may include implementing the GST, reducing subsidies, boosting private investments, and diversifying the economy," he explained. -- BERNAMA