KUALA LUMPUR: Moody’s Investors Service has maintained Malaysia’s A3 stable credit profile, which is underpinned by its diversified, competitive and moderately large economy, ample natural resources and strong medium-term growth prospects.
The large pool of domestic savings also supports the high government debt burden and lowers liquidity risk, the credit rating agency said in a report.
“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, ” it said.
It added that Malaysia’s credit profile reflects “a1” for economic strength, “a2” for institutions and governance strength, “ba2” for fiscal strength and “baa” for susceptibility to event risk.
Factors that could lead to an upgrade include significantly improved prospects for fiscal consolidation, 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.
Additionally, further enhancements to the institutional framework that were to raise governance standards and result in increased policy credibility and effectiveness, including in the management of public finances, and boost Malaysia’s potential growth would also be credit positive.
On the other hand, 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.
“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 added.
Given the additional fiscal spending from recent announcement of the Pemerkasa Plus stimulus package, Moody’s now expects the government’s fiscal deficit to widen to about 6.0%-6.5% of gross domestic product this year.
It noted that risks remained skewed to a wider deficit, should any extension of the lockdown or slow rollback of restrictions prompt additional fiscal support from the government.
“Post-2021, we forecast the deficit narrowing to around 4% of GDP by 2023, assuming that the government remains committed to its 4.8% of GDP average deficit target over 2021-2023.
“We think a combination of expenditure restraint (as support measures are time-based and will expire) as well as revenue recovery alongside economic activity can help the government meet its target.
“However, the deficit will remain wider than the pre-coronavirus average of 3.3% of GDP over 2014-2019, ” it said.