RAM: Resilient economic growth anchors M’sia’s global rating

KUALA LUMPUR: RAM Rating Services Bhd has reaffirmed Malaysia’s respective global and Asean-scale sovereign ratings at gA2 and seaAAA, respectively.

“Although Malaysia’s external-resilience parameters have deteriorated amid a sustained decline in commodity prices and the country’s reduced forex reserves, they are still supportive of its current ratings. Ongoing fiscal consolidation and a robust banking system bolster our view,” the credit rating agency said in a statement. 

“On the other hand, the ratings are weighed down by elevated government debts and high household debt levels relative to comparable economies.” 

It cautioned that Malaysia’s ratings could be revised downwards if its fiscal position deteriorated as a result of rising public debt or contingent liabilities. 

The rating agency said another credit-negative indicator was a persistent current-account deficit. Similarly, the rating could face downward pressures if there are significant deviations in the country’s economic or fiscal reforms.

RAM noted that Malaysia’s economy was projected to expand 4.4% in 2016 (2015: 5.0%), which it called “respectable growth compared to Thailand and Indonesia”. The International Monetary Fund expectsd the Thai and Indonesian economies to grow 3.2% and 5.1%, respectively. 

It added that recently announced fiscal measures – the expansion of direct cash transfers, favourable adjustments to income tax relief and a higher minimum wage – would help prop up consumption growth amid the increased prices of various goods and services. 

“While falling oil prices and a weaker ringgit have strained Malaysia’s fundamentals, its diversified export base and fiscal consolidation are anticipated to see it through the current turbulence,” RAM head of sovereign ratings Esther Lai said in the statement. 
 
Non-commodity export revenue, particularly from electrical and electronic goods (33.5% of total exports in 2014), has recovered in view of the weaker ringgit and will allow the country’s current account to remain in surplus, projected at a respective 2.5% and 1.0% of GDP in 2015 and 2016.

RAM Rating said the Government’s fiscal position had improved, with the deficit expected to decrease to 3.2% of gross domestic product (GDP) in 2015 (2009: 6.7%). 

This is comparable to the fiscal deficits of regional peers and is anticipated to improve (2016: 3.1%) amid the implementation of the Goods and Service Tax and the removal of retail fuel subsidies. 

“Our projection takes into account an expected RM8.1bil (equivalent to 0.7% of GDP) decline in petroleum-related revenues in 2016,” it said. 

Nevertheless, RAM Ratings said Malaysia’s debt burden remained higher than that of most countries with a similar level of development, and was expected to amount to 51.9% of GDP in 2015. 

While elevated, the debt structure remains favourable, as most of the borrowings are denominated in local currency – which is supported by a high domestic savings rate – and are generally long-tenured.  

Separately, it said, the Government’s contingent liabilities – mainly in the form of outstanding government-guaranteed debt – came up to a sizeable 15.1% of GDP as at June 30, 2015, presenting a risk to the country’s fiscal position. 

“However, we derive comfort from the knowledge that the largest issuers of government-guaranteed debt have long maturity schedules, some of these entities being able to support themselves without significant direct fiscal backing. Meanwhile, elevated household debt levels – at 88.1% of GDP as at end-August 2015 – add to the nation’s vulnerability,” it said.