Moody’s raises outlook on Malaysia to positive from stable (Update)

Published: Wednesday November 20, 2013 MYT 3:07:00 PM 

Updated: Wednesday November 20, 2013 MYT 3:37:41 PM

Ratings agency Moody's said on Wednesday that the change in outlook from
stable to positive for Malaysia was driven by improved prospects for fiscal
consolidation and reform and continued macroeconomic stability.

KUALA LUMPUR: Moody's Investors Service has affirmed Malaysia's government bond and issuer ratings at A3. The outlook has been changed to positive from stable.

The international ratings agency said on Wednesday the change in the outlook was driven by improved prospects for fiscal consolidation and reform; and continued macroeconomic stability in the face of external headwinds.

Moody's said it had also affirmed Malaysia's long-term foreign currency (FC) bond ceiling at A1 and its long-term FC bank deposit ceiling at A3. The short-term FC bond and bank deposit ceilings were affirmed at P-1.

It said these ceilings act as a cap on ratings that can be assigned to the FC obligations of entities other than the government that are domiciled in the country.

These ceilings act as a cap on ratings that can be assigned to the FC obligations of entities other than the government that are domiciled in the country.

Moody's also affirmed the local currency (LC) country risk ceiling at A1.

In a related rating action, Moody's affirmed the instrument ratings of Khazanah Nasional Bhd at A3, and revised the outlook to positive from stable. The Malaysian government guarantees these instruments.

Below is Moody’s rating rationale:

Following the May parliamentary elections, the Malaysian government led by Prime Minister Datuk Seri Najib Tun Razak has begun its long-delayed fiscal reform programme to accelerate fiscal consolidation despite a weaker political mandate.

The prime minister has announced the implementation of a Goods and Services Tax (GST) in 2015 for the purposes of broadening the tax base and easing the government's reliance on petroleum-related receipts.

In addition, subsidy rationalisation started in September with an increase in fuel prices, helping to stem the growth of a subsidy bill that has accounted for an increasingly large portion of the government's spending.

While the execution of the government's fiscal reform programme will be politically and administratively challenging, Moody's expects it to result in narrower fiscal deficits that will stabilise Malaysia's debt dynamics.

Although the government's revenues are dependent on petroleum-related receipts, we expect limited volatility from these items, including dividends, royalty payments, and taxes sourced from the national oil and gas company, Petroliam Nasional Bhd (Petronas).

Moody's affirmed the issuer rating of Petronas at A1 in May, and recently assigned a positive outlook to the global integrated oil and gas sector.

Moody's noted that Malaysia's sovereign rating is supported by the government's favourable debt structure, the depth of onshore capital markets, and the high level of domestic savings.

These factors mitigate the effects of wider fiscal deficits and a higher stock of debt as compared to its peers.

As of end-September 2013, foreign-currency denominated liabilities constituted only 3.2% of the government's debt stock, while Malaysia's gross financing needs and the average term to maturity of its debt are in line with other A-rated peers.

Although the proportion of non-resident ownership of government debt rose to 30.3% in June from 16.1% at end-2008, large institutional investors -- such as theEmployees Provident Fund (EPF) –

continue to provide a reliable source of domestic financing.

Moody's refined sovereign bond rating methodology, published in September 2013, assigns greater weight to economic performance, price stability, and the external payments position.

As compared to other A-rated countries, Malaysia has generally exhibited faster growth, lower inflation, and a more robust balance of payments over the past five years.

More recently, since the first quarter of 2012, real GDP growth in Malaysia has averaged 5.1% year-on-year, outperforming other A-rated economies, despite falling commodity prices and relatively lacklustre external demand. Driven in part by the government's Economic Transformation Programme (ETP), the robust level of domestic demand has offset the drag from the fall in net exports in recent years.

More importantly, private investment increased by an average of 17.0% year-on-year between 2010 and 2012, significantly higher than the 2.9% recorded during the preceding five-year period.

Although its pace of growth has moderated to an average of 12.9% year-on-year through the first three quarters of 2013, we expect the strength of private investment spending to be sustained through the next two years.

Moody's further notes that Malaysia's economic resilience has been accompanied by price stability, anchored by the credibility of its central bank, Bank Negara Malaysia.

Since 2008, Malaysia has recorded lower average headline inflation than other A-rated economies. Although much of Malaysia's consumer price basket is subject to administrative controls, core inflation has remained similarly benign. Moody's does not expect subsidy rationalisation to significantly affect inflation performance.

Malaysia's balance of payments remains healthy, despite a narrowing of its current account surplus over the past two years, continued large outward direct investments by Malaysian corporates and banks, and volatile portfolio flows.

And despite the terms of trade shock, resulting in turn from lower prices for Malaysia's commodity exports, Moody's expects the current account to remain in a structural—albeit smaller—surplus, thereby helping to sustain favorable financing conditions for the government and the economy at large.

Malaysia's foreign exchange reserves have come off from recent highs earlier in the year, and stood at US$137.1bil as of end-October, but they continue to act as a formidable buffer against destabilising capital outflows in the event of an external financial shock, such as the anticipated tapering by the US Federal Reserve of its quantitative easing policy.

Constraints to Malaysia's creditworthiness include limited transparency regarding the scale of non-financial public sector indebtedness and the increasing use of off-budget financing vehicles.

In addition, high household debt, combined with a pronounced appreciation in housing prices, represents a potential vulnerability to the banking system that could adversely affect overall economic conditions.

WHAT COULD CHANGE THE RATING 

The positive outlook reflects Moody's expectation of Malaysia's continued economic out performance –

relative to its peers – against challenges in executing its fiscal reform program. Significant consolidation of the government's fiscal deficits and the debt burden could trigger an upgrade.

Although unlikely, given the positive rating outlook, factors that could lead to a change in the outlook to stable, or a negative rating action, include: a significant deterioration in Malaysia's debt dynamics, possibly arising from an inability to successfully implement fiscal reforms; as well as adverse shocks to the country's funding conditions.