Fitch ratings downgrade of Malaysia's outlook no surprise, analysts say

Published: Wednesday July 31, 2013 MYT 1:59:00 PM 

Updated: Wednesday July 31, 2013 MYT 2:01:05 PM

KUALA LUMPUR: As the market reacted anxiously to Fitch Ratings' move to downgrade Malaysia's sovereign credit rating outlook to Negative from Stable, analysts say the decision by the ratings agency came as "no surprise".

According to CIMB Equities Research, it had previously mentioned the risk of the Big 3 rating agencies - Moody's, S&P, Fitch - downgrading Malaysia's sovereign credit rating outlook if there was no clear indications from the government on fiscal reforms regarding subsidies, taxes and government spending after the election.

Unfortunately, there has indeed been none.

The research house pointed to the stasis in the implementation of the GST and the request put in earlier this month in Parliament by the government to add RM12bil to Budget 2013 via supplementary budget, as examples.

The Fitch downgrade on Tuesday, which still maintained the country's existing high investment-grade ratings of "A-" on long-term foreign debt and "A" on long-term local debt, appears to have already spooked the market, with BIMB Securities Researchsaying it may have triggered a flight of foreign funds out of the country on the very same day.

Before the announcement was made by Fitch on Tuesday, the FBM KLCI closed down 3.7% at 1,795.08 points on profit-taking, while government bond yields climb to their highest level since April 2011 and the ringgit weakened to a three-year low.

At midday on Wednesday, the Malaysia's blue chips came under selling pressure, with fund selling seen in Maybank and CIMB which was sparked by Fitch Rating's downgrade. The KLCI was down 17.88 points to 1,777.20 at midday.

BIMB Securities Research pointed to Malaysia's public finances as its key rating weakness.

Federal Government debt rose to 53.3% of GDP at the end-2012, up from 51.6% at end-2011 and 39.8% at end-2008. The general government budget deficit (Fitch basis) also widened to 4.7% of GDP in 2012 from 3.8% in 2011, led by a 19% rise in spending on public wages in a pre-election year.

Hong Leong Investment Bank Research said while the downgrade came earlier than expected, it was already negative on the fundamental aspect of emerging Asia. The research house said it was hopeful the Fitch downgrade would lead to a revisit of fundamentals in Malaysia.

"Due to high foreign shareholding (of more than 47% in Malaysian government securities and 25.2% in equities), we expect both fixed income and equity markets to experience heightened volatility.

"Nevertheless, we do not expect a crisis as BNM has enhanced banking surveillance; reserves are at all-time high, and government debt is mostly financed domestically," it said.

Meanwhile CIMB Research said the Standard & Poor's team - which had affirmed Malaysia's Stable outlook five days prior to the Fitch downgrade - is reportedly heading to Malaysia in September for ratings review exercise.

Stressing that the government was now under pressure to act, it said it expects Budget 2014 presentation on Oct 25 to provide clarity on fiscal policy issues and direction. 

Affin Investment Research pointed out that Fitch had warned that Malaysia's long-term foreign and local currency ratings could also be downgraded in the future, if Malaysia's fiscal performance continued to deteriorate and constrain its sovereign ratings.

"The risk of a downgrade in the country's credit ratings will make it expensive for Malaysia to borrow money from abroad. A lower rating will also dampen investment flow into Malaysia's equity and bond markets, with negative perceptions of the country's deteriorating credit quality," it said

However, it reiterated that Malaysia's economic fundamentals remained sound, with economic outlook improving, current account surpluses sustainable (albeit narrowing), and foreign exchange reserves steadily increasing."It is unlikely that other international rating agencies, such as S&P or Moody's, will downgrade Malaysia's sovereign rating outlook to negative in the near term. We believe the government is committed to a lower budget deficit of 4% of GDP in 2013 (4.5% of GDP in 2012), as well as sustaining government debt as well as contingent liabilities.