Moody’s affirms Malaysia’s A3 rating, stable outlook
In a statement today, Moody’s said the key drivers underpinning the A3 rating and stable outlook are the expectation that the government’s debt burden will remain high, but broadly stable, the relatively high exposure of the economy and financial system to a tightening in external financing, as well as Malaysia’s healthy and resilient growth prospects.
On the government debt burden, it said at 50.9 per cent of Gross Domestic Product (GPP) as of June 2017, Malaysia’s general government debt is significantly higher than the A-rated peer median (40.5 per cent of GDP at end-2016).
“While we expect the debt ratio to remain stable in the next few years, it is also likely to stay above the median for A-rated sovereigns,” it said.
Moody’s said the government’s commitment to fiscal consolidation had resulted in fiscal deficits narrowing in each of the past seven consecutive years.
“While the pace of consolidation will slow going forward, we still expect the deficit to narrow slightly further to 2.8 per cent of GDP in 2018 in line with the budget projections, from 3.0 per cent in 2017 and 6.7 per cent in 2010,” said the ratings agency.
It said deficit reduction has been achieved mainly through tighter spending and the introduction of a Goods and Service Tax in 2015. However, the absence of further meaningful revenue-raising measures, will result in additional fiscal consolidation being limited.
In Moody’s view, achievement of the government’s goal of a balanced budget will thus rest primarily on an expansion in growth, rather than any structural budgetary measures. It did not expect this objective to be achieved by the government’s original target of 2020.
As for the high exposure of the economy and financial system to a tightening in the availability and cost of external financing, Moody’s noted that the active non-resident investor presence in Malaysia’s financial markets, left it vulnerable to sudden swings in capital flows.
It said foreign currency reserves had climbed steadily from a recent trough, but remain lower than economy-wide cross-border debt due over the next year, while foreign reserves are larger than short-term debt by original maturity.
There are several mitigating features against these external vulnerabilities, among them a sizeable surplus on the net international investment position which acts as a cushion and a large domestic institutional investor base which also provides supportive demand, at least for local currency debt, should foreign investors’ appetite for Malaysian assets diminish, Moody’s said.
On growth prospects, the ratings agency said the country had healthy and resilient growth prospects with a highly diversified and competitive economic structure.
“Growth’s resilience through external headwinds, such as the fall in commodity prices and oil prices and a tumultuous political climate, is a testament to the economy’s shock absorption capacity.
“Between 2012-2021, we expect GDP growth to average 5.1 per cent, making Malaysia one of the fastest growing A-rated sovereigns, surpassed only by China, Ireland, and on par with Malta,” it added.
In conclusion, Moody’s said in the absence of further reform, it is expected that the government’s demonstrated commitment to fiscal consolidation will only result in limited improvement on Malaysia’s public indebtedness and debt affordability.
However, it said a robust growth path, which provides the base for an expansion in nominal GDP, lends stability to this debt burden.
While a large foreign investor presence and exposure to commodity-related exports leaves the external position vulnerable to broader shifts in interest rates and global commodity price movements, underlying mitigating factors, including Malaysia’s deep domestic capital markets and strong external position, cushion the impact of such volatility, it added. – Bernama