LONDON: International credit ratings and research agency Fitch Ratings says it does not see any near-term signs that could make it alter its current A- rating stable outlook on Malaysia but maintains that it would continue to monitor the country’s state of public finances.
Managing director and chief operating officer (sovereign and supranational group) Tony Stringer said negative pressure on the current rating could emerge in the event of any deterioration in the trajectory of public finance.
“One of the relative weaknesses (of Malaysia) is the level of public debt which is just over 50%, and the other relative weakness compared to the rest which are in category A is governance standards.
“So I think if there was any material increase in public debt or any material weakening in the governance standards, these could be potential triggers (for downgrades),” he told StarBiz in an interview.
Having said that, Stringer pointed out that Malaysia was now at the high end of the credit spectrum among all the Asean countries it rates which include Thailand, Indonesia, the Philippines and Vietnam.
“I think that reflects some strength on the external side, in terms of its strong net external creditor position.”
“I think our forecast for Malaysia’s growth for 2017 is broadly in line with the authorities’, at around 4%, and again, if you look at the credits in the A category, many of which are developed economies, they won’t be growing at that kind of rate, so it’s a relative strength in that category,” he added.
Stringer said Malaysia’s growth story has been “pretty impressive” and although the current account which has remained in surplus was coming down a little, the overall picture has been quite stable.
“We also rate Singapore and it’s a triple A but that’s separate because it is a fully developed economy.”
Stringer was one of the speakers at the recently concluded Invest Asia UK conference held here and organised by Maybank Kim Eng.
According to him, for a sovereign to be in the A category, a combination of factors were needed and the most important factors tend to be driven by things like governance standards and more broadly what Fitch calls structural features.
These include variables such as the level of development in an economy , the quality of human capital and the business environment.
On Malaysia, Stringer said Fitch would continue to monitor public finances, for example, whether the Government was able to reduce its annual budget deficit.
“And whether that combined with the growth path is enough to set the government debt ratio on a downward trend. That would be supportive of the current rating.”
While it doesn’t see any near-term signs to change its rating in either direction, Stringer said governance remained somewhat of a concern for Malaysia.
“We use World Bank Governance Indicators and relative to peers in the A category, Malaysia doesn’t score as highly.
“Obviously, there has been this long running saga related to 1MDB which has I suppose allowed analysts and commentators to call into question governance practices and until that is fully resolved, and everything related to that is behind the country, there’s the potential for it to act as a drag on policy making or investor confidence.”
Meanwhile, Maybank Kim Eng head of fixed income research Winson Phoon believes that the worst is over for Malaysia’s bond market which saw a record RM26.2bil of local bonds being dumped by foreigners in March, owing largely to liquidity issues.
Phoon, who was one of the panel speakers at the conference said Bank Negara’s foreign exchange (forex) hedging measures introduced in April, and the country’s fundamentals should result in investor interest coming back.
“The second quarter has been slightly positive, I think we may potentially see funds coming back to the local bond market,” Phoon said.
“Basically the first quarter was very bad, it was negative but we think that the worst is over, in fact if you look at equities flows, it has been quite positive , it’s just the bond flows that have been underperforming.
“We think we should be attracting some funds back because of fundamentals and forex policies.”
On the ringgit’s fair value to the greenback, he said Maybank Kim Eng’s house view was that it should be 3.65.
“But it doesn’t trade at a fair value in the market to be honest, it is like a voting machine, the more votes you get, the stronger your currency, the less votes you get because of some negative headline news or political noise, your currency depreciates.”
A total of 31 corporates from 12 countries, including China, South Korea, Taiwan, India, Malaysia, Thailand, Indonesia, the Philippines and Pakistan, covering North Asia and Asean, participated in the Invest Asia UK conference.
Collectively, the corporates have a total market capitalisation of about US$500bil.