Fitch Ratings maintains Malaysia’s ‘negative outlook’

The Malaysian Reserve

| October 30, 2013

While it recognises the government's move to address its fiscal deficit, the international ratings agency is still cautious on the matter.

by P Vijian

PETALING JAYA: Despite steadfast efforts by Malaysia to fix its pressing fiscal deficit, international rating agency Fitch Ratings maintained its “negative outlook” for the country.

While recognising Prime Minister Najib Tun Razak’s commitment to address Malaysia’s fiscal weaknesses, Fitch is cautious about his strategy.

Last Friday, Najib, who is also the finance minister, announced the RM264.2 billion budget for 2014 and introduced a major tax reform, the Goods and Services Tax (GST). It would take effect on April 15, 2015.

The outlook on Malaysia sovereign’s “A-” Foreign- and “A” local-currency ratings was revised to negative in July 2013, due to deterioration in public finances and a perceived weakening of prospects for fiscal consolidation and budgetary reform, according to Fitch.

“We will look, however, for a track record of implementation towards the stated goal of deficit reduction (as a percentage of gross domestic product (GDP), backed by subsidy rationalisation and GST introduction over 2014-2015, hence the ratings remain on negative outlook,” said Fitch in statement posted on its website last Monday.

Malaysia’s commitment to lowering the government’s deficit and introduction of GST are potentially constructive steps, but a track record of budget management remains key to limiting further credit pressure on the sovereign rating, added Fitch.

Another Fitch’s concern is whether Malaysia can avoid the emergence of twin public and external deficits.

“As we have previously highlighted, the rapid erosion of Malaysia’s current account surplus has been driven partly by a draw down of public-sector savings as well as by increased investment.

“The slippage of the current account position into deficit could increase Malaysia’s vulnerability to renewed market tensions when Federal Reserves tapering becomes more likely,” said the agency.

Meanwhile, Standard & Poor’s Ratings Services (S&P) said budget 2014 would not impact on the sovereign ratings and outlook on Malaysia.

S&P has a “A-” long-term and “A-2” short-term foreign currency sovereign credit rating on Malaysia.

“The budget targets 3.5% deficit of the GDP for next year, down from 4% this year. This is in line with our expectations of a gradual fiscal consolidation over the medium-term,” it said.

Another international rating agency, Moody’s Investors Service described Najib’s reform efforts as positive.

“Malaysia’s Budget 2014, with its call for fiscal consolidation and reform of the country’s subsidy system, will, if fully implemented, be credit positive for the government’s finances,” said Moody’s.