Fitch downgrades Malaysia’s Rating: What Does It Mean?

Fitch Ratings downgraded Malaysia's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'BBB+' from 'A-'. Prior to this downgrade, Malaysia had maintained a rating of 'A-' since 8 November 2004, see Fig 1. Fitch revised Malaysia’s ratings outlook from negative to stable after the downgrade to BBB+, signals current sovereign rating will likely remain in the immediate term. Fitch cited some macro factors that supported the decision on the country’s sovereign credit profile, and these concerns were i) the COVID-19 crisis on country's fiscal burden, which was already high relative to peers going into the health crisis, ii) lingering political uncertainty as well as prospects for further improvement in governance standards, and iii) weak investment and low tourism receipts due to the pandemic that reduced economic activity.

The downgrade reflected mainly the concern related to the deterioration in the country’s public finances and public debt burden. Fitch expects the fiscal deficit to remain high at 5.4% of GDP in 2021, from an estimated deficit of 6.0% of GDP in 2020, with an average deficit of 4.5% of GDP projected from 2021 through 2023. Fitch cautioned on the government’s revenue shortfall partly exacerbated by the removal of GST.

On the debt level, Fitch projects general government debt to increase to 76% of GDP in 2020 from 65.2% of GDP in 2019. This includes the reported “committed government guarantees” on loans which are serviced by the government budget (12.6% of GDP in September 2020) and 1MDB’s net debt (1.3% of GDP in September 2020). According to Fitch, the debt burden is significantly higher than the medians of 59.2% and 52.7% for the 'A' and 'BBB' rating categories, respectively.

However, Fitch noted that the country’s debt/GDP ratio will likely remain broadly stable after the pandemic recedes. On Malaysia’s external finances, Fitch projects current account surplus of the balance of payments (BOP) to narrow to 3.4% of GDP projected for 2021 from 4.2% of GDP in 2020, as the import compression due to the pandemic recedes and government spending on infrastructure development is revived.

Both Standard & Poor’s Ratings Services (S&P) and Moody’s Investors Service (Moody’s) have maintained the country’s long-term foreign currency issuer default rating at A- and A3 respectively, see Fig 4. However, S&P assigned Malaysia’s outlook long-term foreign currency issuer default rating from stable to negative on 26 June 2020. After Fitch's downgraded Malaysia's sovereign rating, the question is whether S&P and Moody’s will follow suit to revise Malaysia’s actual ratings.

The downgrade means that it will become more costly for Malaysia to borrow. That has a fiscal impact. The ringgit and yields on Government securities will be adversely affected. But any sell-off could be absorbed by institutional funds.

If Q4 results of companies are poor, bankruptcies rise, unstable political situation, debt-to-GDP ratios rise further, and current account surpluses diminish, further stress and consequently rating revision by Standard & Poor’s and Moody’s could be expected.

The positives so far are that the ringgit has appreciated (against the dollar) since March 2020, inflation is below 1.5%, car sales are up and demand for energy, especially LNG, is picking up.

On balance, we need to focus on exports, fiscal discipline and improving economic activity. The MoF needs to work harder to convince S&P and Moody’s not to downgrade based on stimulus package and forecasts of other international agencies of Malaysia’s prospects for 2021. In addition, develop new incentives for exports, improve domestic demand, accelerate sustainable energy and tourism receipts for a better performance in 2021.

 

References:

1.     Malaysia Economy – Fiscal Update, 6 December 2020, Affin Hwang Capital

2.     Economists have mixed views on Fitch’s rating cut, 7 Dec 2020, The Star