SINGAPORE: Standard & Poor’s Ratings Services affirmed its ‘A-’ long-term and ‘A-2’ short-term foreign currency sovereign credit ratings on Malaysia.
At the same time, the rating agency affirmed its ‘A’ long-term and ‘A-1’ short-term local currency ratings on Malaysia with a stable outlook for its long-term rating.
In a statement, S&P said it also affirmed its ‘axAAA/axA-1+’ ASEAN regional scale rating on Malaysia because the fall in oil prices that it expects would not disrupt Malaysia’s long-term fiscal consolidation.
“We believe the economy can withstand some weakness in the energy sector owing to its fairly diversified and broad-based growth,” it added.
It has lowered its oil price assumptions significantly for 2015-2018 after prices for crude oil in the spot and futures markets had fallen by over 50 per cent since June 2014.
“In August 2014, when we last reviewed Malaysia, we expected Brent oil prices to average US$105 per barrel in 2015 and US$100 per barrel in 2015-2018.
“We now estimate that Brent oil prices will average US$55 per barrel in 2015 and US$70 per barrel in 2015-2018.
Consequently, we have revised our macroeconomic projections for Malaysia,” it said.
Malaysia derived approximately 15 per cent of its Gross Domestic Product (GDP), 30 per cent of government revenue (oil and gas taxes and royalties, plus dividends from Petronas and 14 per cent of exports from the hydrocarbons sector. The rating agency said Malaysia has been proactive in mitigating the fallout of the slump in oil prices.
In its revised budget for 2015, announced on January 20, the government implemented various measures to ensure that fiscal consolidation efforts remained on track.
The revised 2015 budget estimated that the fiscal deficit would widen to 3.2 per cent of GDP from the original forecast of 3 per cent.
“We expect the government to maintain its long-term target to balance the Federal Budget by 2020.
We believe Malaysia’s external position is strong enough to withstand a slowdown in the oil and gas sector over the next two years,” it added.
It said Malaysia’s strong external position, a result of years of current account surpluses, underpinned the ratings.
The net external asset position turned negative in 2012 due to a decline in foreign reserves.
However, S&P said external indicators were likely to remain close to current levels on account that Malaysia would likely have healthy trade surpluses over the next two to three years.
It also viewed Malaysia as having a high degree of monetary flexibility with the central bank’s track record in controlling inflation indicating strong monetary flexibility that attenuated major economic shocks.
Malaysia also has a deep domestic bond market, compared with most of its peers, which reduced its reliance on external financing.
Policymaking in Malaysia has generally been effective and institutions have remained stable since the 2013 elections, it said, adding that the government’s announcement of a new Goods and Services Tax (GST), its removal of oil subsidies in December 2014 and its swift announcement of a revised budget suggested that the narrow margin of electoral victory has not impeded policymaking.
It expected the government to gradually continue with its economic reforms.
S&P also said Malaysia’s fiscal performance has been on an improving trend after deteriorating in the wake of the global financial crisis.
It projected the average annual increase in general government debt at 2.8 per cent of GDP over 2015-2018.
The annual increase in general government debt averaged six per cent over 2009-2012, in the aftermath of the 2008 crisis.
Malaysia’s high subsidy spending and heavy dependence on energy-related revenues weighed on its fiscal position.
In its opinion, the rating agency said the government’s measures to rationalise oil subsidies and introduce GST (at 6 per cent) in 2015 would accelerate fiscal consolidation and allow for a reduction in government debt.
It forecast that net general government debt peaked at about 49 per cent of GDP in 2013, and expected it to decline gradually as fiscal consolidation proceeds.
In its view, a continuing increase in contingent liabilities and other forms of off-budget financial support could offset the benefits of Malaysia’s fiscal consolidation measures.
“We view the government’s guarantees on debts (including letters of support such as that behind the US$3 billion bond issued by 1Malaysia Development Bhd.) as direct commercial financial obligations of the government should these entities fail to pay.
“The share of non-resident holders of ringgit-denominated Malaysia government securities has risen sharply to 47 per cent (as of end September 2014) from about 15 per cent just seven years earlier.
“Such high holdings by non-residents leave the country’s capital market vulnerable to a sudden reversal in flow of cross-border funds, which are often more volatile than domestic funds.
“Nonetheless, we believe Malaysia’s strong external position and deep domestic bond market act as important cushion,”it added.