Moody’s has warned that although Malaysia’s budget deficit is expected to contain at 3.1% to 3.2%, its debts against gross domestic product (GDP) is seen as exceeding the “danger limit” of 55% this year.
CRUDE oil prices have hovered around US$40 (RM161) per barrel in recent weeks, higher than the Government’s estimate of US$30 to US$35 (RM131 to RM141) and Petronas’ US$30 for 2016.
The rationalisation of the RM42bil debts of 1Malaysia Development Bhd (1MDB) has been implemented smoothly with the sale of its energy assets and stake in Bandar Malaysia.
The ringgit has been strengthening in recent weeks from its September 2015 low of 4.46 to a dollar. Last Tuesday and Wednesday, it hit below the psychological level of 4.0 against the dollar. The current level of the ringgit is stronger than Moody’s assumption of 4.20 for the currency for this year.
But these favourable developments for the country have failed to persuade international rating agency Moody’s Investors Service to turn even slightly positive on Malaysia.
Moody’s had in January this year revised down the rating outlook on Malaysia to “stable” from “positive”, while maintaining the A3 sovereign credit rating on Malaysia.
Although the implementation of major policy reforms has mitigated the negative impact of lower oil prices on the Government’s fiscal position, external pressures have led to a deterioration in Malaysia’s growth and external metrics, according to the rating agency.
The sharper than expected economic slowdown of China, Malaysia’s largest trading partner, has also taken a toll on our country’s exports.
In sum, lower commodity prices, weaker external demand, negative fiscal impulse and poor sentiment have sent the GDP growth down to 5% last year, from 6% in 2014.
Moody’s is seeing GDP growth at 4.4% this year while Bank Negara Malaysia is projecting a 4% to 4.5% growth.
Indeed, the rating agency is seeing more challenges ahead for Malaysia.
Hence, risks to the economy were highlighted on Wednesday when Christian de Guzman, a vice-president of Moody’s, came to Kuala Lumpur to brief his clients on “intensifying risks to growth and the Government of Malaysia”.
His views were presented to Moody’s clients, which include the Government, Petronas and banking institutions, as well as senior journalists from the local and foreign media.
Moody’s senior analyst for sovereign rating warned that although Malaysia’s budget deficit is expected to be contained at 3.1% to 3.2%, its debts against gross domestic product (GDP) is seen as exceeding the “danger limit” of 55% this year.
Malaysia’s export downturn is broad-based and for some commodities, lower prices have more than offset higher volumes, he said.
And the dwindling and smaller current account surplus represents a narrower buffer against capital flows, he added.
Vikas Halan, Moody’s oil and gas analyst, is also bearish. He predicts that the oil price will stay range-bound despite some recovery recently.
Fundamentals for crude oil have not changed: There is a large oversupply and excess inventory, China’s slowdown adds further downside risk, and shale oil production will act as a ceiling for the oil price increase.
He maintains his forecast that the average price for crude oil will stay at US$33 (RM133) per barrel, against the current level of US$40 (RM161).
“On the demand side, China’s slowdown was more pronounced than expected. On the supply side, there is a new player (Iran). While Opec’s (Organization of the Petroleum Exporting Countries) freeze may not hold, demand growth may be modest over the next few years,” said Vikas.
Crude oil prices have risen following news reports that top producers might agree on a production freeze to boost prices when they meet in Doha on April 17.
The WTI of US rose last week to above US$40 for the first time since December, due also to a sharp drop in the dollar, which makes crude oil less expensive.
On Wednesday, the Moody’s team also held a question-and-answer session with journalists.
Excerpts on the economy, politics, central bank, ringgit and 1MDB:
> Has your rating on Malaysia taken into account the political situation?
Yes. In our account of political risk, we acknowledge the weakening of political risk in Malaysia. But the pressure on the Prime Minister (PM) to quit has limited impact on policy matters and fiscal consolidation.
> Does the change of the central bank governor next month pose a risk if it is politically motivated and the new chief is less competent?
We see Bank Negara Malaysia as an institution of strength. The transition does pose risk. But we believe Zeti (Bank Negara governor Tan Sri Zeti Akhtar Aziz) is leaving the central bank in a good state, with strong legacies – these things do not change overnight.
Everywhere in the world there is a political element in the appointment of a central bank chief. What the market is concerned with is how policies are shaped after the handover. It’s going to take a couple of policy meetings to tell how good the new governor is.
> Will your rating on Malaysia change if there is a change of leadership, in view of the continuous calls for the PM to step down?
Our baseline is to see this PM to the 2018 general election. The present government will go to the 2018 election. A change in PM will not change our assumptions wholesale. We are interested in policy direction. If there is a change, the new PM would be someone in the same party – Umno – not someone from the opposition. The opposition does not seem to be working together to form a credible threat to the present government.
> What about the risk posed by 1MDB, as foreign countries are also conducting investigations into 1MDB transactions?
1MDB at the moment poses less contingent risk than six months ago because of its debt rationalisation. There is no systemic risk posed to the banking sector now. But the development relating to 1MDB did lead us to lower our assessment of Malaysia’s institutional strength.
> Crude oil price has stabilised at US$40 per barrel in recent weeks. Do you see price sustainability?
Any spike in crude oil price will require structural changes to the production profile of Russia and Saudi Arabia. There is too much supply at the moment.
The underlying trends which led us to downgrade Malaysia back in January are still there; they have not changed.
But our prediction of oil price at US$33 per barrel in January this year did not take into account the possible production freeze.
> Is Tun Dr Mahathir Mahamad’s sacking as adviser to Petronas of concern?
We have not seen any impact on Petronas’ policies. The national oil company has announced reduction of capital expenditure, which is positive for the company.
It has been flexible in its dividend policy, reducing dividend to Government. This is positive for the oil company but negative for the Government. It is in a net cash position.
At the moment, Petronas is doing something other oil companies are doing.
> Would you consider an upward adjustment to your ringgit rate, with reports that the US might not raise interest rates next month?
We are not foreign exchange strategists. We are seeing fluctuations in the exchange rate and the potential for a lot of volatility ahead. We are fairly conservative and assume the rate at 4.2 for the year.
The US central bank action is not to the sole determinant of capital flows (inflows and outflows), which determine the exchange rate.
Although the ringgit is at 4.0 now, it is still early. There are still nine months to go for the year. But we will revise our forecast accordingly if that is the sustainable trend.
But for government finance, the exchange rate has minimal impact.
> What are your views on Malaysian banks?
Bank fundamentals remain robust. The banks’ asset quality is better than expected. But banks posted weaker margins and returns on assets last year.
For this year, there is potential for higher non-performing loans for banks due to weakened credit metrics for corporations.
High household leverage remains a concern although the slower growth in unsecured consumer loans is positive.
And property price correction could pose asset quality risks. During 2014, 20% to 30% of new mortgages exhibited loan to value ratios in excess of 90%. The quality of these loans could be at risk in a scenario of falling property prices or significantly higher interest rates.
> When can we see credit rating change back to “positive” from “stable”?
We need to see a sustainable trend in fiscal consolidation and strengthening of the buffer.
We note that Bank Negara’s international reserves buffer has stabilised, but the current account surplus is declining.
Positive triggers include a greater convergence in government debt metrics with similarly rated peers, accompanied by improvements in debt affordability and a reduction in fiscal deficit.
On the other hand, a negative rating action could result from a significant worsening in Malaysia’s debt dynamics or fiscal accounts, possibly arising from an inability to manage the impact of lower crude oil and agricultural commodity prices.
The crystallisation of large contingent liabilities and an even greater deterioration in the balance of payments could also exert downward pressure on the rating.
We project the government debt to GDP ratio to exceed the 55% of the GDP threshold based on our estimates of both the fiscal deficit and nominal GDP growth this year.
While we expect the Government to adhere closely to its stated deficit target of 3.1% of GDP, we currently assume lacklustre nominal GDP growth compared to our current assumption of 4.4% real GDP growth.
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