PETALING JAYA: The move by S&P Global Ratings to revise its outlook on Malaysia’s long-term ratings to negative from stable will not significantly impact the ringgit and lead to capital outflows, thanks to the nation’s robust external position and sound long-term growth.
Economists agree that Malaysia’s macroeconomic fundamentals are still healthy and the Covid-19 pandemic curve has successfully been flatten, which would pave the way for foreign funds to invest into the country.
Bank Islam chief economist Mohd Afzanizam Abdul Rashid told StarBiz to an extent, the revision would affect the value of ringgit, especially when the risk-off mode has been quite prevalent these days following the sharp increase in new Covid-19 cases in the US.
He, however, noted that the country’s robust external position, sound long-term growth prospects and monetary flexibility are deemed to offset the associated risks to government finances.
“In that sense, the depreciation of ringgit should be transitory. Furthermore, our interest rates are much higher compared to the advanced countries benchmark rate.
“This could entice foreign funds to come in at some point as the US Fed is likely to keep the Fed Fund Rate at 0.25% until 2022, ” Afzanizam said.
Last Friday, S&P said it revised Malaysia’s outlook to negative to reflect pressures on Malaysia’s fiscal and debt settings, which have been exacerbated by the pandemic.
It also affirmed its A- long-term and A-2 short-term foreign currency sovereign credit ratings, as well as A long-term and A-1 short-term local currency ratings on Malaysia. As at press time yesterday, the ringgit was trading at RM4.28 to the US dollar from the previous close of RM4.29. Year-to-date the greenback had strengthened by 4.73% against the ringgit.
Malaysian Rating Corp Bhd (MARC) chief economist Nor Zahidi Alias said the ringgit has not reacted partly because the adjustment in the rating “outlook” may not necessarily lead to an actual adjustment in sovereign rating.
“What is more critical are the factors that could mitigate the downward pressure on the rating. For instance, additional government’s medium-term revenue enhancing measures that could widen its future revenue base will be credit positive.
He said the ringgit has benefitted from the recent recovery in global crude oil prices, noting that it has resulted in capital flows into the Malaysian shores.
In May, total net foreign inflows into Malaysia’s bond market improved to RM1.5bil (April: net foreign inflows of -RM2.0bil). This reflects positive sentiment due in part to Malaysia’s still robust external position, he said.
The medium-term prospect of ringgit, Zahidi said however, hinges on macro parameters that affect the actual sovereign rating of the country.
Meanwhile, AmBank Group chief economist and member of the Economic Action Council secretariat Anthony Dass (pic below) said the revision by S&P would likely have limited impact on the ringgit, adding that thus far the ringgit has traded between a high of 4.296 and low of 4.285 to the Greenback.
“The macroeconomic fundamentals are still healthy. Besides the recovery measures and opening up of the economy plus fairly stable virus cases and room for another OPR cut in July by as much as 50bps should bode well. The ringgit is likely to trade around 4.25-4.30 to the US dollar for the year, ” Dass said.
The reliance on debt has become more pronounced in 2020 as the government introduced four economic stimulus packages all in just five months, with an unprecedented cumulative value of RM295bil.
About RM45bil or slightly over 15% of the stimulus packages will come from the government’s direct injection. Of the amount, RM35bil will be financed through debt,
Socio-Economic Research Centre executive director Lee Heng Guie points out that the debt-to-GDP ratio has already exceeded the 55% limit as at end-March 2020.
It is worth noting that Moody’s Investors Service has warned earlier in 2020 that Malaysia’s debt affordability is weaker than other countries with similar ratings.
In 2019, the federal government’s interest payments account for about 13% of its revenue, significantly higher than the A-rated median of 4%.
The rating agency also said that the government’s debt burden remains higher than similarly-rated countries, pointing out that “Malaysia’s high debt burden is a significant constraint on the rating”.
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