Malaysia’s economy has stabilised amidst falling government revenue

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KUALA LUMPUR: Malaysia’s A3 government bond rating and stable outlook suggests a resilient economy against structural fiscal challenges posed by the trend deterioration in revenue, as well as signs of weakening institutional strength, according to Moody’s Investors Service.

“We expect robust gross domestic product (GDP) growth of 4.3% on average in 2017-2018 and continued current account surpluses. The stability in foreign currency reserves belies currency and capital flow volatility. Reserve adequacy has improved slightly, but is still relatively low when compared with its A-rated peers,” Moody’s said in a report.

The report constitutes an annual update to investors and is not a rating action.

Moody’s pointed out that the Malaysian government had demonstrated its commitment to fiscal consolidation, with seven consecutive years (2010-2016) of narrowing fiscal deficits, involving a curtailment of expenditure to offset the continued weakness in revenue generation.

“The country’s debt burden likely peaked in 2015, registering just under 55% of GDP, although debt affordability has continued to worsen. Meanwhile, reform momentum has stalled and Moody’s does not expect any significant change before the next elections due by May 2018,” it added.

The rating agency said factors that could prompt a positive rating action include a greater convergence in government debt metrics with similarly rated peers, accompanied by improvements in debt affordability and a reduction in the fiscal deficit.

“Conversely, a negative rating action could result from a significant worsening in Malaysia’s debt dynamics or fiscal accounts, or an inability to manage the impact of external shocks on the real economy or the financial system.

“The crystallisation of large contingent liabilities and an even greater deterioration in the balance of payments could also exert downward pressure on the rating,” it said.