Malaysia dodges a downgrade from Fitch; ringgit, stocks jump (Update 2)


  • Business
  • Wednesday, 01 Jul 2015

KUALA LUMPUR: Fitch Ratings unexpectedly raised its outlook on Malaysia to "stable", saying it expects the country's fiscal deficit to narrow further this year despite lower oil prices, sending the ringgit and local stocks higher.

The agency on Wednesday maintained Malaysia's long-term foreign currency issuer default rating (IDR) at A- and local currency at A, with the outlook revised up from negative.

In July 2013, Fitch attached the "negative" outlook to Malaysia, and it suggested earlier this year there was a 50 percent chance of a downgrade in the rating.

Wednesday's decision, which surprised economists, lifted Malaysia's benchmark stock index by 0.7 percent in early trade and the ringgit by 1 percent.

"It's a giant win for Malaysia, in particular with respect to the sentiment which has been overly negative," said Euben Paracuelles, economist at Nomura Holdings. "The move back to 'stable' corrects a lot of that".

In a statement, Fitch said Malaysia's fiscal finances have improved and views progress on the Goods and Services Tax (GST) and fuel subsidy reform as supportive of the fiscal finances.

The Southeast Asian net energy exporter has been navigating tricky economic environment where oil prices have softened and its ringgit currency weakened to 10-year lows against the U.S dollar. A controversy surrounding debt-laden state fund 1MDB has also weighed on Malaysia's currency and credit rating.

A NARROWING SURPLUS

Fitch said "the depth of Malaysia's local capital markets supports the sovereign's domestic financing needs."

It added that while the share of non-resident holdings of government securities was high and the sovereign's debt profile was weak, "local agencies such as (the) Employee Provident Fund (state pension fund) can provide funding to support the sovereign in the event of a sell-off by non-residents".

Fitch also said Malaysia's fiscal position remained weak, but it forecast that Malaysia's current account will see a surplus of 1.4 percent of gross domestic product this year and 1.1 percent in 2016.

The narrowing current account was attributed to "a decline in the savings rate and a pick up in investments that is partly driven by the Economic Transformation Programme".

Concerns over 1MDB lingers as "federal government debt and explicit guarantees continue to increase," Fitch said. The agency added that it believed the Malaysian sovereign was incurring additional contingent liabilities beyond explicit guarantees because of quasi-fiscal operations of 1MDB.

"Fitch thinks there is a high probability that sovereign support for 1MDB would be forthcoming if needed," it said.

PRESSURE ON THE PM

Malaysian Prime Minister Najib Razak has come under pressure from former premier Mahathir Mohamad to step down over alleged mismanagement of the economy and the performance of 1MDB, whose advisory board is chaired by Najib.

This has also weighed on the ringgit, which was worst performing currency in emerging Asia this year until Wednesday morning's strengthening. At present, the rupiah has weakened more.

"The ringgit will still see pressure in the near term with the narrowing current account," said Michael Wan, economist at Credit Suisse.

"But market-wise, it is going to be positive now that it removes the uncertainty of potential move in credit rating for the next few months."

Malaysia achieved its fiscal deficit target of 3.5 percent last year. It originally had a target of 3 percent in 2015, which was revised to 3.2 percent following the drop in global oil prices.

The country also amended its growth forecast between 4.5 and 5.5 percent, from 5-6 percent.

Standard & Poor's has a "stable" outlook while Moody's has "positive".- Reuters

Earlier report

KUALA LUMPUR: Fitch maintained Malaysia's long-term foreign currency issuer default rating (IDR) at A- and local currency at A, with the outlook revised to stable from negative previously.

Fitch said in a statement that Malaysia's fiscal finances have improved and views progress on the Goods and Services Tax (GST) and fuel subsidy reform as supportive of the fiscal finances.

The Southeast Asian net energy exporter has been navigating through a tricky economic environment where oil prices have softened and its ringgit currency weakened to 10-year lows against the U.S dollar. A controversy surrounding debt-laden state fund 1MDB has also weighed on Malaysia's currency and credit rating.

Fitch attached a "negative" outlook to Malaysia in July 2013, and suggested earlier this year that there was a 50 percent chance of a downgrade in the rating.

"The depth of Malaysia's local capital markets supports the sovereign's domestic financing needs," Fitch said.

It added that while the share of non-resident holdings of government securities was high and the sovereign's debt profile was weak, "local agencies such as (the) Employee Provident Fund (state pension fund) can provide funding to support the sovereign in the event of a sell-off by non-residents".

The deficit was forecast to narrow further this year despite lower oil prices, Fitch said. Nevertheless, it said Malaysia's fiscal position remained weak.

"Federal government debt and explicit guarantees continue to increase," Fitch said, adding that it believed the Malaysian sovereign was incurring additional contingent liabilities beyond explicit guarantees because of quasi-fiscal operations of 1MDB.

"Fitch thinks there is a high probability that sovereign support for 1MDB would be forthcoming if needed," it said.

Malaysian Prime Minister Najib Razak has come under pressure from former premier Mahathir Mohamad to step down over alleged mismanagement of the economy and the performance of 1MDB, whose advisory board is chaired by Najib.

This has also weighed on the ringgit, which is the worst performing currency in emerging Asia so far this year. The ringgit closed slightly stronger at 3.77 against the dollar on Tuesday.

Central Bank Governor Zeti Akhtar Aziz has said the weakness in the ringgit was expected to be temporary.

Standard & Poors and Moody's had assigned Malaysia ratings equivalent to Fitch's A-. Fitch had been the only one opting for a "negative" outlook previously.

Standard and Poor's has a "stable" outlook on Malaysia, while Moody's outlook is "positive".- Reuters

Earlier report:

KUALA LUMPUR: Fitch maintained Malaysia's long-term foreign currency issuer default rating (IDR) at A- and local currency at A, with the outlook revised to stable from negative previously.

Fitch said in a statement that Malaysia's fiscal finances have improved and views progress on the Goods and Services Tax (GST) and fuel subsidy reform as supportive of the fiscal finances.

The Southeast Asian net energy exporter has been navigating through a tricky economic environment where oil prices have softened and its ringgit currency weakened to 10-year lows against the U.S dollar. A controversy surrounding debt-laden state fund 1MDB has also weighed on Malaysia's currency and credit rating.

Fitch attached a "negative" outlook to Malaysia in July 2013, and suggested earlier this year that there was a 50 percent chance of a downgrade in the rating.

"The depth of Malaysia's local capital markets supports the sovereign's domestic financing needs," Fitch said.

It added that while the share of non-resident holdings of government securities was high and the sovereign's debt profile was weak, "local agencies such as (the) Employee Provident Fund (state pension fund) can provide funding to support the sovereign in the event of a sell-off by non-residents".

The deficit was forecast to narrow further this year despite lower oil prices, Fitch said. Nevertheless, it said Malaysia's fiscal position remained weak.

"Federal government debt and explicit guarantees continue to increase," Fitch said, adding that it believed the Malaysian sovereign was incurring additional contingent liabilities beyond explicit guarantees because of quasi-fiscal operations of 1MDB.

"Fitch thinks there is a high probability that sovereign support for 1MDB would be forthcoming if needed," it said.

Malaysian Prime Minister Najib Razak has come under pressure from former premier Mahathir Mohamad to step down over alleged mismanagement of the economy and the performance of 1MDB, whose advisory board is chaired by Najib.

This has also weighed on the ringgit, which is the worst performing currency in emerging Asia so far this year. The ringgit closed slightly stronger at 3.77 against the dollar on Tuesday.

Central Bank Governor Zeti Akhtar Aziz has said the weakness in the ringgit was expected to be temporary.

Standard & Poors and Moody's had assigned Malaysia ratings equivalent to Fitch's A-. Fitch had been the only one opting for a "negative" outlook previously.

Standard and Poor's has a "stable" outlook on Malaysia, while Moody's outlook is "positive".- Reuters

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