S&P Ratings sees higher volatility in Malaysia's financial markets

  • Economy
  • Tuesday, 25 Feb 2020

On Monday, Tun Dr Mahathir Mohamad resigned as the prime minister but the King had appointed him as interim PM.

KUALA LUMPUR: Heightened political uncertainty due to the collapse of the Pakatan Harapan (PH) government is likely to give rise to higher volatility in Malaysia's financial markets and potentially spur some capital outflows, S&P Global Ratings said.

In its statement issued on Tuesday the rating agency said however, it did not yet believe there was a strong likelihood for major changes to medium-term factors such as fiscal and economic policies.

“Still, the government's collapse coincides with an already difficult period for the Malaysian and regional economies amid the Covid-19 outbreak; there is a risk that this development could delay implementation of measures aimed at mitigating the economic impact.

“The government's ability to maintain its policy focus during this challenging time will be important. A swift transition to a new government would likely mitigate these associated risks, ” it said.

On Monday, Tun Dr Mahathir Mohamad resigned as the prime minister. The exit of the 26 Parti Pribumi Bersatu Malaysia Members of Parliament and 11 from the Pakatan Rakyat (PKR) led to the collapse of the PH government.

However, the King had appointed him interim prime minister.

S&P said Dr Mahathir's resignation and the collapse of the PH government had augured fresh uncertainty in the political landscape.

“S&P Global Ratings believes there is no material impact on Malaysia's key credit factors at this point, ” it said.

It also expected a period of political bargaining and realignment toward efforts to form a new government.

“The wide variety of possible outcomes could either lead to a new coalition government or fresh elections. Nevertheless, political uncertainty will undermine policymaking and affect investor confidence.

“Malaysia's fiscal settings have faced increasing pressure in recent years, owing to a large accumulation of crystalised contingent liabilities on the government's balance sheet and the weakening of some important revenue-generating

measures, such as the former government's goods and services tax programme, ” it said.

S&P said if new political developments suggest a weakened commitment to fiscal consolidation, this could result in downward pressure on the sovereign credit ratings on Malaysia (foreign currency A-/Stable/A-2; local currency A/Stable/A-1).

“The country's economic growth outlook is also important for our ratings; an extended period of uncertainty could undermine growth. We believe the scale of these risks will be proportionate to the duration of uncertainty regarding the formation of Malaysia's next government, ” it said.

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