Fitch: ‘Negative’ outlook on M’sia

Fitch: ‘Negative’ outlook on M’sia
Business & Markets 2013
Written by Zatil Husna Wan Fauzi of theedgemalaysia.com
Wednesday, 31 July 2013 09:54

KUALA LUMPUR: Fitch Ratings has revised its outlook on Malaysia to “negative” from “stable”. This has led to the government implementing budgetary reforms and fiscal consolidation to address weaknesses in public finances.

Citing Malaysia’s public finances as its key rating weakness, the global rating agency said the federal government’s debt increased to 53.3% of GDP at end-2012 from 51.6% in the previous year, up from 39.8% in 2008.

The agency also highlighted that the government’s budget deficit widened to 4.7% of GDP in 2012 from 3.8% a year ago, adding that expenditure on public wages rose by 19% due to it being the pre-election year.

“We believe it will be difficult for the government to achieve its interim federal government deficit target of 3% for 2015 without additional consolidation measures,” the rating agency said in a statement yesterday.

“Fitch sees risks even to the achievement of the agency’s 3.5% deficit projection, as this has already factored in one percentage point of GDP of spending cuts. This leaves Malaysia’s public finances more exposed to any future negative shock.”

Fitch has affirmed Malaysia’s long-term foreign and local currency issuer default ratings (IDRs) at A- and A, respectively, while the short-term foreign currency IDR has been affirmed at F2 and the country ceiling at A.

The rating agency said Malaysia’s fiscal revenue base is low at 24.7% of GDP, against an A range median of 32.8%.

“Fitch has long emphasised two key budgetary vulnerabilities: reliance on petroleum-derived revenues and the high and rising weight of subsidies in expenditure. Petroleum-derived revenue contributed 33.7% of the federal revenue in 2012, broadly comparable with lower-rated Mexico (BBB+/stable), another sovereign with a narrow and oil-dependent fiscal revenue base,” the rating agency said.

Malaysia’s high level of private sector leverage is also a risk from a credit perspective, said Fitch, adding that credit to the private sector reached 118% of GDP at end-2012, above the A median of 94%.

Notwithstanding these weaknesses, Fitch acknowledged the strengths in the composition of Malaysia’s debt and in its funding base, as the federal government debt is overwhelmingly denominated in the local currency (97% at end-2012) and has a smooth maturity profile. In particular, the Employees’ Provident Fund held 28.8% of Malaysian government securities at end-March 2013.

“The rising role of non-resident investors points to growing exposure to global investor risk appetite, but Fitch views strengths in Malaysia’s external finances as a buffer against volatility. The impact of heightened market tensions on Malaysia’s government debt market since June has been mild compared with some regional and rated peers so far,” it said.

Fitch said external finances remain as the “key sovereign credit and rating strength”, with the economy recording a net external creditor position worth 30% of GDP at end-2012 against the A range median creditor position of 17%.

“The sovereign’s own net foreign asset position of 21.3% of GDP and net foreign exchange creditor position of 44% were stronger than A medians of 16.8% and 14.4%, respectively. This is despite a decline in the current account surplus to a projected 3% of GDP in 2013 from double digits each year from 2003 to 2011 amid the rising investment and a drop in the savings rate, led by the public sector,” Fitch said.

The rating agency said Malaysia’s five-year average GDP growth rate of 4.3% (2009-2013) compares favourably with the A median of 2.6% and the BBB median of 2.7%.

However, it noted that such growth is boosted by the government’s investment programme, a primary reason for the real gross domestic fixed capital formation (GFCF) to increase at a high rate of 19.9% in 2012, against a five-year average of 5.6% per annum from 2007 to 2011. GFCF contributed +4.4 percentage points to 2012’s 5.6% GDP growth.



This article first appeared in The Edge Financial Daily, on July 31, 2013.