1MDB’s debt included in Malaysia’s government debt: Moody’s

KUALA LUMPUR: Moody’s Investors Service has affirmed Malaysia’s local and foreign currency issuer and senior unsecured debt ratings at A3. The outlook remains stable.

In a statement Friday, the rating agency said the affirmation recognises that Malaysia’s fiscal strength has weakened.

“Government debt will stay high for longer and the government’s fiscal policy choices will narrow the revenue base and reduce fiscal flexibility further. At the same time, robust growth potential, notwithstanding a slowdown in the next few years, and deep domestic capital markets continue to support the rating at A3.

“A solid institutional framework, including strong monetary policy effectiveness, also supports the credit profile, although in Moody’s view, the government will face hurdles to significantly reining in pervasive corruption,” it added.

Moody’s said the stable outlook balances credit constraints from low debt affordability and a high debt burden against inherent credit strengths, including resilient economic growth and a stable and broad funding base for the country’s debt.

Moody’s has also affirmed the backed senior unsecured US dollar trust certificates issued by Malaysia Sovereign Sukuk Bhd and the backed senior unsecured debt issued by Malaysia Sukuk Global Bhd, special purpose vehicles established by the Government of Malaysia at A3.

“The payment obligations associated with these certificates are direct obligations of the government. In Moody’s opinion, the payment obligations represented by the securities issued by these two special purpose vehicles are ranked pari passu with other senior, unsecured debt issuances of the government. As such, ratings for the sukuk issuances mirror the Government of Malaysia’s issuer rating,” the rating agency said.

Moody’s has also affirmed the local currency ratings on the backed senior unsecured debt issued by Khazanah Nasional Bhd at A3. The Malaysian government guarantees these instruments.

Malaysia’s long-term foreign currency (FC) bond ceiling is unchanged at A1 and its long-term FC deposit ceiling is A3. Malaysia’s short-term FC bond and deposit ceilings are also unchanged at Prime-1 and Prime-2 respectively. The long-term local currency (LC) bond and deposit country ceilings are unchanged at A1.

Explaining the ratings rationale further, Moody’s said following a change in government in May 2018, the new government signaled a significant shift in policy priorities, towards supporting lower incomes and enhancing the transparency of public finances.

“The government’s fiscal choices, most notably the abolition of the Goods and Service Tax (GST), will have long-lasting negative effects on revenue collection. Moreover, the measures implemented and announced will lead to a concentration of the revenue base on oil-related revenues and a dependence on non-tax revenues, such as dividends from state-owned enterprises, that will limit fiscal flexibility in future years. As a result, Moody’s assesses that Malaysia’s fiscal strength has weakened,” it said.

Moody’s said following the Malaysian government’s assertion that liabilities from state-owned entity 1 Malaysia Development Bhd (1MDB) will be resolved and involve budget transfers, Moody’s will include 1MDB’s outstanding debt in its estimates of Malaysia’s government debt.

As a result, Moody’s expects Malaysia’s debt burden to rise to 52.8 per cent of GDP in 2018 and remain relatively stable thereafter.

Moody’s expects GDP growth to slow to slightly under 5 per cent from 2018, owing to slower trade flows and lower investment growth.

“Notwithstanding this slowdown, Malaysia’s growth will remain stronger than the median average for A-rated sovereigns. In the longer term, Malaysia’s economic prospects are supported by well-developed infrastructure, substantial natural resources, globally competitive manufacturing and services sectors,” it added.

Over the medium term, the probability of an upgrade would rise if the scope for fiscal consolidation increase significantly, pointing to decline in the government debt burden and improvements in debt affordability.

A reduction in external vulnerability risks, such as through a reversal of the rise in short-term external debt liabilities that would diminish Malaysia’s sensitivity to capital flows would also support a rating upgrade.

On the other hand, Moody’s said it would likely downgrade Malaysia’s rating should it revise its prospects for fiscal consolidation and anticipate a marked increase in government debt over the next few years.

In the context of broad-based and likely lasting tensions between the US and China, significantly slower global trade and heightened uncertainty about the trade environment impeding investment could also undermine Malaysia’s economic strength. If sustained, this would put downward pressure on the rating, Moody’s added.

Source: NST