PETALING JAYA: Fiscal discipline by the government remains an important factor in maintaining investors’ confidence towards Malaysia’s capital market, says Moody’s Investors Service.
According to the international rating agency, Malaysia remained susceptible to swings in capital flows and investor sentiment due to the high degree of foreign investor participation in both the country’s equity and debt markets.
Meanwhile, Goldman Sachs said US funds remained optimistic about the ringgit-denominated assets although there were some concerns about Malaysia’s fiscal outlook under the new government.
Moody’s noted that the change in government in Malaysia following the 14th General Election (GE14) on May 9 had resulted in a period of policy uncertainty.
While the development would not materially affect the country’s growth outlook and debt burden in the near term, Moody’s said, the progress of fiscal consolidation under the new administration led by Pakatan Harapan, which won GE14 last month, could have an impact on its assessment of Malaysia’s sovereign rating.
“While we will look at any new policy measures holistically to gauge their impact on the sovereign’s credit profile, fiscal measures are a key focus, given that Malaysia’s relatively high debt burden already acts as a credit constraint,” Moody’s said in a statement yesterday.
“Consequently, to what extent the new government achieves fiscal deficit consolidation will be vital in gauging the eventual effects on Malaysia’s fiscal metrics and credit profile,” it added.
Moody’s pointed out that fiscal discipline would be vital in maintaining investors’ confidence, particularly in light of a high degree of foreign investor participation in both equity and debt markets, which exposed Malaysia to portfolio flow volatility.
As at end-2017, non-resident investors held 28% of outstanding government instruments and 28% of the equities on Bursa Malaysia as of May 2018.
“This leaves the sovereign susceptible to swings in capital flows and investor sentiment,” Moody’s said.
Moody’s analysis was contained in its recently-released report, titled “Government of Malaysia: FAQ on credit implications of the new government’s policies”.
The report analyses the implications of the new Malaysian government’s (A3 stable) policies on the sovereign’s credit profile.
The rating agency noted that consistent deficit reduction in the past had kept the federal government debt burden below the authorities’ self-imposed ceiling of 55% of gross domestic product (GDP).
In addition, the fiscal deficit had narrowed for eight consecutive years to 3% of GDP in 2017 from 6.7% in 2009, albeit at an increasingly gradual pace. According to budgeted estimates, which the new government has said it would adhere to, the deficit would narrow further to 2.8% of GDP in 2018.
Moody’s maintained its estimate of Malaysia’s direct government debt at 50.8% of gross domestic product (GDP) in 2017 despite the outcome of the GE14 last month, which resulted in the transition of power away from the incumbent party that led the country for more than six decades.
It said its assessment of contingent liability risks posed by non-financial sector public institutions had also not changed following some statements by the new government.
“However, the new administration’s treatment of large infrastructure projects that may be placed under review, but have benefited from government-guaranteed loans in the past, and outstanding debt from state fund, 1Malaysia Development Bhd, will play an important role in determining risks that contingent liabilities pose to the credit profile,” Moody’s said.
Commenting on the impact of the new government’s removal of the country’s goods and services tax (GST), Moody’s said in the absence of effective compensatory fiscal measures, the development was “credit negative” because it would increase the government’s reliance on oil-related revenue and narrow the tax base.
Moody’s estimated revenue lost from the scrapped GST would be around 1.1% of GDP this year – even with some offsets – and 1.7% beyond 2018; thus further straining Malaysia’s fiscal strength.
On the planned reintroduction of fuel subsidies, it viewed that as “credit negative” because subsidies distort market-based pricing mechanisms.
The move could also strain both the fiscal position and the balance of payments while raising the exposure of government revenue to oil price movements, Moody’s said.
On the growth outlook, Moody’s said that the change in government would not materially alter growth trends in the near term.
“The removal of GST could boost private consumption in the short term,” it said.
“However, a review of large infrastructure projects could also result in any pick-up in investment being more spread out than previously anticipated,” it added.
It maintained its 2018 GDP growth forecast for Malaysia at 5.4%.
Meanwhile, Goldman Sachs said US institutional investors remained “constructive” on the ringgit despite concerns about Malaysia’s fiscal outlook under the new government.
The global banking group noted among the key issues of concern that US funds had were how the Pakatan Harapan-led government would fund its election pledges and whether the reduced infrastructure spending would be sufficient to reduce imports and hence improve the country’s current account balance.
“Despite the risk of a slowdown in economic growth (as a result of lower infrastructure spending), investors said this could be positive for the ringgit if the current-account position improved,” Goldman Sachs wrote in its report after meeting institutional investors in the United States.
Did you find this article insightful?