Highlight Fitch says fuel price hike cannot alter Malaysia’s “negative outlook”

Highlight Fitch says fuel price hike cannot alter Malaysia’s “negative outlook”
Business & Markets 2013
Written by Cynthia Blemin of theedgemalaysia.com
Tuesday, 03 September 2013 19:03

KUALA LUMPUR (Sept 3): Fitch Ratings said today that Malaysia’s measures to lower fuel prices is “too small” to alter its “negative outlook” on Malaysia's 'A-' sovereign rating issued in July.

Last night, Prime Minister Datuk Seri Najib Razak announced price hikes for RON95 petrol and diesel by 20 sen a litre and the delay of several public-sector projects, except for the MRT2 and MTR3 projects.

He said the fuel price increase will save the government RM1.1 billion in subsidies for the rest of this year and a further RM3.3 billion annually, which could help address the narrowing current-account surplus.

Malaysia's measures to lower fiscal subsidies and limit import-intensive investment show the government's intention to stem pressure on the sovereign credit profile from deteriorating public finances, noted Fitch.

But the global rating agency will keep its current rating on Malaysia despite the measures. It lowered the country’s sovereign outlook to “negative” from “stable” in July 2013.

“The upshot is that the corrective fiscal measures are too small to alter the Negative Outlook on Malaysia's 'A-' sovereign rating,” said Fitch in a statement today.

“The timing of yesterday's announcement seems responsive to heightened global market volatility brought on by impending Fed tapering and greater investor scrutiny of vulnerabilities in emerging markets,” commented Fitch.

The rating agency said only sustained reform implementation, accompanied by structural measures to broaden the revenue base, could make a difference to the sovereign's credit profile.

“But an intensification of reforms that can also withstand potential growth headwinds is not on the cards at present,” it opined.

According to the rating agency, Fitch was already factoring in a net 1ppt of GDP reduction in government expenditure in its fiscal projections for the period to 2015, so these fuel price measures do not significantly alter its economic analysis.

“The measures are consistent with Fitch Ratings' fiscal projections, and are credit-neutral over the near term,” it said, adding that rating on Malaysia could only be reverted to “stable” if more steps to improve fiscal sustainability and long-term macroeconomic stability are taken.

However, Fitch said the fuel subsidy reduction is “a first, small, step” ahead of possible additional measures to shore up public finances.

And it believes “a more calibrated pace of public investment prioritising non-import-intensive projects” will limit the risk of near-term fiscal overruns and lower the likelihood of the current account slipping into a deficit.

“We estimate that Malaysia's current account surplus will fall - sharply - to 3% of GDP this year after averaging 11% over 2009-2012,” it said.

The rating agency said effective fiscal consolidation in the next 12 months will by no means be easy due to falling commodity prices and the weakening political position of the ruling coalition, which implies the government may encounter difficulties in implementing revenue-enhancing reforms such as the Goods & Services Tax (GST).