Thursday, August 22, 2013

`Malaysia must step up fiscal, structural reforms'


Publication: NST
Date of publication: Aug 1, 2013
Section heading: Business Times
Page number: 004
Byline / Author: By Rupa Damodaran

KUALA LUMPUR: MALAYSIA'S public savings and structural reforms must be stepped up to stabilise the country's credit outlook globally without risking further downgrades, Fitch Ratings warned.

The bulging household debt to gross domestic product (GDP) is also another important feature in Malaysia's credit profile, although the Fitch's Banking System indicator of "bbb" suggests the standalone strength of Malaysian banks as a buffer.

Andrew Colquhoun, head of Asia-Pacific Sovereigns team, however, said the outlook, which spans between eight months and two years on the average, can be subject to changes and "depends on what transpires" and the government's commitment.

Fitch Ratings has revised Malaysia's outlook to "negative" from "stable".

Its long-term foreign and local currency issuer default ratings (IDRs) have been affirmed at "A-" and "A", respectively.

The revision reflects its assessment that prospects for budgetary reform and fiscal consolidation to address weaknesses in the public finances have worsened since the government's weak showing in the May 2013 general election.

Federal government debt rose to 53.3 per cent of GDP at end-2012, up from 51.6 per cent at end-2011 and 39.8 per cent at end-2008.

The general government budget deficit widened to 4.7 per cent of GDP in 2012, led by a 19 per cent rise in spending on public wages.

"If the government debt ratio rises to more than 55 per cent - which is not a magic number to us - it raises the question of the consolidation efforts (commitment)," he said in a teleconference on Malaysia's negative outlook.

Colquhoun, who is based in Hong Kong, stressed on the significance of Budget 2014 and broadening of the revenue base via the goods and services tax (GST), which will enable the rating agency to to have a more positive credit perspective of Malaysia.

According to Fitch, it will be difficult for Malaysia to achieve its three per cent deficit target to the GDP for 2015 without more consolidation measures.

Another area of concern is the level of government-guaranteed debt, which rose to 15.2 per cent of GDP by the end of 2012 from nine per cent at the end of 2008 due to the participation of state-owned enterprises in government-led investment programme.

The non-financial public sector deficit soared to 10.2 per cent of GDP in 2012 from 3.5 per cent in 2011.

Private sector leverage is also of concern as credit has reached 118 per cent of GDP end of last year.

The rising role of non-resident investors points to growing exposure to global investor risk appetite, but Fitch views strengths in Malaysia's external finances as a buffer against volatility.

Credit Suisse described it as an interesting and symbolically important move that could be followed by the other two main rating agencies Standard & Poor's and Moody's.

The research houses had earlier flagged that the current account deterioration, high fiscal deficit and rising quasi-fiscal deficit could trigger a move to negative watch.

"In our view, the chance of an actual ratings downgrade over the next 12 months is 60 to 70 per cent, while we expect other agencies to follow Fitch in due course."

On Fitch's call to Malaysia to step up on its fiscal consolidation and budgetary reform, Credit Suisse commented that any moves in that direction will be unlikely before Umno's party elections on October 5.

A key test of the government's budgetary resolve will come with the government's 2014 budget announcement on October 25.

"No doubt Fitch and the other rating agencies will be looking for some credible tightening measures, including an increase in what are extremely generous fuel subsidies, as well as a clear timetable for the introduction of GST," it said.

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