Malaysia gets belated recognition from non-believers

THE decision by global rating agency Standard and Poor’s (S&P) to upgrade Malaysia’s long-term foreign currency rating (together with that of Thailand and Indonesia) must be particularly gratifying for Prime Minister Datuk Seri Dr Mahathir Mohamad. 

He leaves office at the end of the month after 22 years, and the S&P upgrade is an acknowledgment of his shrewd stewardship of the national economy, particularly in overcoming the Asian financial crisis of 1997-98 and steering the economy back on the growth path. 

Not that the Prime Minister is seeking kudos from S&P. He has little fondness for international rating agencies – they completely missed the coming of the Asian financial crisis, and when Malaysia imposed selective foreign exchange controls and the ringgit peg to stop speculators from making a mockery of the currency, the foreign rating agencies were vociferous in their condemnation. 

Moody's Investors Service even wrote a long piece warning that Malaysia was heading for the rocks. 

On Sept 15, 1998 – two weeks after the imposition of forex controls – S&P downgraded Malaysia’s foreign currency rating to BBB-minus with a negative outlook. This was the lowest of the investment grades and just one grade above junk bond status. 

Because of the downgrades by the foreign rating agencies, the cost of funding for Malaysia escalated. Even bonds from a well-managed and highly profitable corporation like Petronas carried ridiculously high coupon rates then (on the secondary market, Petronas bonds were traded almost like junk bonds). 

On Wednesday, S&P announced it had upgraded Malaysia’s rating from BBB-plus to A-minus to reflect a better-than-expected fiscal performance and the smooth transition of leadership from Dr Mahathir to Datuk Seri Abdullah Ahmad Badawi. 

The latest upgrade means that Malaysia has come a long way from the difficult times of the Asian financial crisis. But it’s still not back to the pre-Asian financial crisis level when Malaysia’s rating was A-plus

The rating business is a funny business: it has to do with fundamentals, performance and perception. 

One can calculate the fundamentals and performance of a company or a country based on some universally accepted principles, but perception is very subjective. It depends very much on the vantage point of the observer. 

But perception is very critical to decision-making and that’s where countries like Malaysia always get the wrong end of the stick. 

In the West, Dr Mahathir is perceived to be anti-West and dictatorial; Malaysia is perceived to be unstable and the country is seen as a haven for terrorists. This perception arose because many of those who should know better do not do their homework or are prejudiced. 

Because of this misperception, Malaysia has been made to suffer. 

But we are a small country; we need the West more than the West needs us. So going forward, the authorities have to persevere and work hard to correct this misperception. 

I agree with S&P’s assessment for upgrading Malaysia: it expects a better-than-expected fiscal performance, and a smooth political transition. 

Although the Malaysian 2004 Budget aims to keep the deficit at 3.3% of gross domestic product (from an estimated 5.4% for 2003), like S&P, I think a figure closer to 4.2% is more likely. The main point, however, is that the government is serious about reining in the budget deficit. 

I do not see any problems with the leadership transition. Pak Lah, as Abdullah Badawi is fondly known, is a worthy successor to Dr Mahathir. The personal style will be different, but the objectives are the same. 

Belatedly, the stock market and the foreign funds have come to recognise this. And what a run-up we are seeing on the KLSE during the past few days! 

There is a deep sense of anticipation that after six long difficult years, Malaysia is finally bouncing back. 

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