Fenner: Malaysia’s success in securing the Japanese government’s guarantee for the Samurai bonds should improve some of the country’s debt servicing cost.
KUALA LUMPUR: Malaysia is unlikely to see any immediate credit rating downgrade despite its slowing economy growth and the projected increase in the country’s budget deficit, according to the Institute of Chartered Accountants in England and Wales (ICAEW).
The accounting institute’s economic adviser and Oxford Economics lead Asia economist Sian Fenner said the Pakatan Harapan government’s efforts to restore public finances and better manage the federal government debt have raised confidence in the national fiscal management over the medium term.
“The government’s move to improve transparency and governance standards is one of the credit positive factors.
“The fact that the government is bringing some of the contingent liabilities back into the balance sheet and addressing the liabilities accordingly, is also positive in the eyes of credit rating agencies.
“Not only that, Malaysia’s success in securing the Japanese government’s guarantee for the Samurai bonds should improve some of the country’s debt servicing cost going forward, and this is expected to continue supporting the country’s positive credit ratings,” she told reporters after a dialogue held by ICAEW here yesterday.
When tabling Budget 2019, Finance Minister Lim Guan Eng revealed that the Japanese government had offered to guarantee up to 200 billion yen for the issuance of 10-year Samurai bonds via the Japan Bank of International Cooperation. The bonds would be issued at an indicative coupon rate of 0.65% before March next year.
Few days later, it was announced that Japan has also made another offer to guarantee 200 billion yen-denominated bonds. Malaysian officials who spoke to The Star confirmed the Samurai bond offer but clarified that it would be issued, if needed, after six months of the first Samurai bond issuance.
Despite the expectation for the country’s credit ratings to be maintained, Fenner cautioned that the risks of a potential downgrade has risen. This was primarily on the back of the government’s increased reliance on oil-related revenue.
She said continued weakening in global crude oil price poses higher risk on the national revenue.
ICAEW’s latest report “Economic insight: South-East Asia” projected Malaysia’s economic growth to moderate in 2019 to 4.5%, down from the estimated 4.8% growth this year.
ICAEW head of Malaysia Loh Wei Yuen said the country’s lower gross domestic product (GDP) growth next year was a result of the ongoing US-China trade conflict and tighter global monetary conditions.
Meanwhile, the national budget deficit for next year is estimated to come in at 3.5% of GDP, marginally higher than the government’s official guidance of 3.4%.
“This forecast reflects a more cautious outlook for GDP growth over 2019 to 2020, and a likely delayed effect of a potential boost to revenues from new taxes announced in Budget 2019,” the report said.
The report also pointed out that Malaysia’s budget deficit could widen to 3.8% in 2020, if Brent oil prices hit US$55 per barrel from 2019 to 2020 with no reduction in government expenditures.
“Coupled with a lower current account surplus, this could trigger an adverse feedback loop of higher interest rate costs and/or a run by foreign investors. We estimate that a higher risk premium on Malaysian sovereign bonds would lead the 10-year yield to increase by 30 basis points above our baseline by end-2020 and the ringgit to be around 2% weaker against the US dollar.
“If the oil shock led to a credit rating downgrade, 10-year bond yields would end-2020 at around 5.2% (a 15-year high) versus our baseline of 4.7%,” it said.
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