KUALA LUMPUR: The credit profile of Malaysia (A3 stable) is supported by its large, diversified and competitive economy, strong medium-term growth prospects compared with similarly rated peers and ample natural resources, Moody's Investors Service says.
In a report issued on Monday, it said the institutions have also demonstrated effectiveness in macroeconomic policymaking and financial supervision.
“Although government debt is moderately high, debt structure is favourable and the government has access to a large pool of domestic savings.
“We expect real GDP growth to remain at the lower end of its 2014-18 range, averaging 4.5% over the next two years because of weaker global growth, but remain higher than peers, ” it said.
The rating agency said balanced against these credit strengths are the government’s narrow revenue base that limits fiscal flexibility, challenges to further fiscal consolidation, and institutional weaknesses in control of corruption and governance.
“External vulnerability drives Malaysia’s susceptibility to event risks because of sizeable external debt repayments relative to foreign-exchange reserves.
“We expect the government’s fiscal deficit to average of 3.3% of GDP over 2020-21, as slower growth compared with the past decade, the abolishing of the goods and services tax that has narrowed the revenue base, and ongoing social spending needs continue to weigh on government efforts to further reduce deficits.
“The stable outlook indicates that risks to Malaysia’s rating are balanced, ” it said.
Moody's also said the rating could be upgraded if prospects for fiscal consolidation were to improve significantly, particularly through measures that broadened the currently narrow revenue base, and pointing to a sustained decline in the government debt burden and improvement in debt affordability.
A reduction in external vulnerability risks that diminishes Malaysia’s sensitivity to confidence based capital flows, such as through a reversal of the rise in short-term external debt liabilities, would also be credit positive.
The rating could be downgraded if government debt was to increase markedly over the next few years, whether through wider currently assume fiscal deficits or significant financial support to state-owned enterprises over a number of years.
“Rising political tensions and divergences of views within the government that undermined policy effectiveness and threatened the stability of capital flows could also lead to a rating downgrade.
“In the context of broad-based and likely lasting global trade tensions, weaker medium-term growth prospects beyond our current expectations, including through lower investment, could also lead to a rating downgrade, ” it said.
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