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Fitch affirms Malaysia’s credit rating with stable outlook

KUALA LUMPUR: Fitch Ratings has affirmed Malaysia’s long-term foreign currency issuer default rating (IDR) at “BBB+” with a stable outlook.

Malaysia’s rating balanced prospects for strong and broad-based medium-term growth and persistent current account surpluses with a highly diversified export base, against high public debt, a low government revenue base and lingering political uncertainty, the firm said.

Fitch said Malaysia’s economy was gradually recovering from a contraction of 5.6 per cent in 2020 caused by the Covid-19 pandemic, even though social distancing measures have been tightened over recent months.

“A nationwide lockdown in place since the beginning of June due to a third Covid-19 wave, is negatively affecting the services sector.

“However, manufacturing and exports continue to benefit from thriving demand for Malaysia’s export products, including electronics, crude oil and personal protective equipment made of rubber,” it said today.

Fitch expects Malaysia’s gross domestic product (GDP) to grow 4.5 per cent this year and 6.3 per cent in 2022, as the output gap narrows and the vaccine roll-out gathers pace, which should allow the services sector to benefit from pent-up demand.

Risks to its growth forecasts are mainly related to the evolution of the pandemic.

“Close to a quarter of the population has received a first vaccine dose, while the government aims to inoculate 80 per cent of the population by the end of year and appears to have secured enough vaccines to do so.”

Fitch said the government’s social distancing measures had been accompanied by material relief measures.

These include social security payments, wage subsidies, grants to SMEs, allocation for the procurement of vaccines, corporate loan guarantees and a repayment moratorium on certain bank loans.

As a result of this relief spending and reduced government revenue, the firm expects the fiscal deficit to rise to 6.5 per cent of GDP in 2021, from 6.2 per cent in 2020.

Part of the additional operational spending will be financed by increased revenue from above-budget international oil prices and dividends from government-linked enterprises.

Fitch said the pandemic had caused a significant rise in Malaysia’s general government debt, in line with its rating peers.

It forecasts the country’s debt to reach 78.1 er cent of GDP in 2021, from a pre-pandemic level of 65.2 per cent in 2019.

The debt figures used by Fitch include officially reported “committed government guarantees” on loans, which are serviced by the government budget, and 1MDB’s net debt, equivalent in December 2020 to 12.7 per cent and 1.4 per cent of GDP respectively.

On this basis, the debt burden is significantly higher than the median of 57.0 per cent for sovereigns in the “BBB” rating category.

Malaysia’s gross debt is over 400 per cent of revenue, around three times the peer median.

Fitch expects the debt ratio to decline slightly to 77.0 per cent of GDP in 2022 and for this trend to continue, facilitated by the resumption of strong GDP growth.

Malaysia’s medium-term fiscal outlook remained subject to heightened political volatility, which may prompt more spending to garner support in parliament and delay meaningful revenue measures, it said.

“We expect a gradual reduction in the fiscal deficit, which is forecast to average 5.2 per cent of GDP over 2021 through 2023 (above the government’s average target of 4.5 per cent) as growth lifts revenues and Covid-19-related spending measures lapse.

Fitch expects general government revenue to remain low at 18.2 per cent of GDP in 2021 (“BBB” median: 26.6 per cent).

The country’s dependent on oil production, which the government expects to generate 16 per cent of total revenue this year, is expected to drop from 25 per cent in 2020, when Petronas provided a special dividend.

The low revenue base is exacerbated by the removal of the goods and services tax in 2018 (which was replaced with a narrower sales and services tax) and has in recent years led the government to draw on special dividends of government-linked companies.

Fitch said lingering political uncertainty weighed not only on the policy outlook, but also on investment and prospects for an improvement in governance standards.

Malaysia has been running consistent annual current account surpluses for more than two decades.

Fitch expects it to continue to do so in the next few years, although the surplus is likely to narrow to 3.6 pr cent of GDP in 2022 from 4.1 per cent in 2021, as import compression will likely gradually dissipate.

The firm also expects the country’s monetary policy to remain supportive of economic activity, after Bank Negara Malaysia reduced its policy rate by a total of 125 basis points since the start of the pandemic.

“The window for further policy rate cuts appears to be limited, given the approaching US Fed tapering and an increase in inflation in Malaysia, albeit from the base effect from low fuel prices last year,” it said.

Source: NST