Moody’s: Malaysia’s credit profile backed by strong medium-term prospects


Moody’s Investors Service says Malaysia's (A3 stable) credit profile is underpinned by its diversified, competitive and moderately large economy, ample natural resources and strong medium-term growth prospects.

KUALA LUMPUR: Moody’s Investors Service says Malaysia's (A3 stable) credit profile is underpinned by its diversified, competitive and moderately large economy, ample natural resources and strong medium-term growth prospects.

It said on Thursday the large pool of domestic savings supports the high government debt burden and lowers liquidity risk.

“Credit challenges include the government's narrow revenue base, which limits fiscal flexibility in response to shocks such as the coronavirus pandemic, as well as political noise that may distract from policy priorities, ” it said.

Below is the statement released by Moody’s Investors Service:

The stable outlook reflects our view that risks to Malaysia's credit profile remain consistent with the A3 rating level based on current assumptions.

We do not expect the coronavirus pandemic to have a sustained negative impact on Malaysia’s economic model; as such, the current and any subsequent waves of infections will delay, but not materially hinder the economy’s eventual return to high growth rates.

The authorities’ track record of effective macroeconomic policies, including prudent fiscal policies, has also continued to lengthen, despite ongoing noise in the political landscape.

Factors that could lead to an upgrade

Upward pressure on the rating would develop if prospects for fiscal consolidation were to improve significantly, particularly through measures that broadened the currently narrow revenue base, pointing to a sustained decline in the government debt burden and improvement in debt affordability.

Further enhancements to the institutional framework that were to raise governance standards and resulted in increased policy credibility and effectiveness, including in the management of public finances, and boosted Malaysia’s potential growth would also be credit positive.

Factors that could lead to a downgrade

Downward pressure on the rating would stem from a further weakening in the government’s debt and debt affordability metrics, a sharp rise in contingent liabilities, and/or a softening of the commitment to medium-term fiscal consolidation that were to result in continued deterioration in the government’s fiscal strength.

Volatile politics that undermined the credibility and effectiveness of institutions and threatened the stability of capital flows would also be credit negative.

In the context of the longer-term uncertainty over global trade patterns and supply chains, weaker medium-term growth prospects, including through structurally lower investment, would additionally put downward pressure on the rating.

Malaysia's credit profile reflects “a1” economic strength, “a2” institutions and governance strength, “ba2” fiscal strength, and “baa” susceptibility to event risk.

Our “a1” assessment of Malaysia’s economic strength reflects the country's relatively strong medium-term growth prospects compared with peers and high level of diversification, while the scale of its economy is moderately large.

A combination of well developed infrastructure, competitive services (particularly in financial services and tourism) and manufacturing sectors, and substantial natural resources underpin the economy's longer-term potential.

Malaysia’s “a2” institutions and governance strength reflects solid executive and legislative institutions, strengthening rule of law, and a track record of effective macroeconomic policymaking.

This is balanced against perceived weaknesses in control of corruption, checks and balances, and voice and accountability compared with similarly rated peers, as well as the slow pace of revenue-enhancing fiscal reforms that constrains fiscal policy credibility and effectiveness.

Fiscal strength

We assess Malaysia’s fiscal strength to be “ba2”, which takes into consideration the government's narrow revenue base and high debt burden compared with peers, as well as challenges to rapid fiscal deficit reduction because of pandemic-related spending and limited options to cut expenditure further.

Our estimates for the government's debt include the debt of some state-owned enterprises (namely 1Malaysia Development Berhad, SRC International and Suria Strategic Energy Resources) that benefit from an explicit guarantee from the government and that, in our view, are unlikely to be able to service their debt independently.

Revenue as a share of GDP is among the lowest across A-rated peers and has fallen further in recent years, weighing on debt affordability as measured by interest payments as a percent of government revenue and limiting the government's ability to provide fiscal support in response to a large shock.

Furthermore, the government has become more reliant on petroleum revenue after the abolishment of the goods and services tax in 2018, which can be volatile as demonstrated in the oil price movements over 2014-16 and again during the pandemic.

These challenges are in part mitigated by favourable domestic funding conditions backed by a large pool of savings that will continue to allow the government to fund itself almost entirely in local currency while keeping interest payments anchored.

We have set the score below the initial score of “ba1” to reflect our expectation that the rise in debt burden and deterioration in debt affordability due to the pandemic will weaken the government's fiscal strength beyond the current scorecard metrics.

We assess Malaysia’s susceptibility to event risk to be “baa”, driven by political risk.

Our assessment of Malaysia's “baa” political risk reflects the uncertainty and noise in domestic political developments that may distract the government from its policy priorities and hinder its ability to implement policies that effectively address weaknesses in the credit profile.

Domestic political volatility may also deter foreign investment and technological transfer, which would in turn impede the transformation of the economy into a high-tech, high value-added one.

At “a”, Malaysia's external vulnerability risk takes into account its structural current account surplus that provides stability to capital flows and the balance of payments.

The country's deep domestic capital market and effective macroeconomic policies also support its external resilience.

While short-term external debt liabilities are moderately high relative to foreign-exchange reserves, around a third of these liabilities consists of interbank lending within the same banking group, which reduces repayment risk.

Banking sector

Our “a” assessment of Malaysia's banking sector risk reflects the banking system's stability, supported by prudent financial supervision and regulation, which limits contingent liability risks to the government's balance sheet.

We assess Malaysia's government liquidity risk to be “aaa”, reflecting the government's ability to access a deep pool of domestic savings and a wide range of domestic and foreign investors in local currency markets.

The ease of access to capital markets helps to keep the government's effective borrowing costs anchored, despite the high government debt burden and sizeable gross borrowing requirements.

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