S&P cuts rating on Ringgit: Analysts wary about fiscal deficit

Standard & Poor's yesterday lowered Malaysia's local currency rating toA from A+, a move expected to have little impact on the bond market as it followed changes to the agency's methodology and assumptions for rating sovereign governments.

However, analysts said Malaysia's inability to cut back on subsidies and consolidate its fiscal position indicated a long-term weakness in the country's public finances.

“Malaysia risks not meeting its fiscal deficit target of 5.4% this year,” said Chua Hak Bin, an economist in Singapore for Bank of AmericaMerrill Lynch. “The reluctance to cut fuel subsidies despite projections that the subsidy bill could double risks straining the fiscal position.

“Fiscal consolidation has taken a back seat. The Government is more focused on winning the next general election and securing popular support,” he added.

Standard & Poor's, which left the foreign currency rating unchanged, said: “Malaysia's rating constraints are its moderately weak fiscal and debt profile for the rating category.

“In our view, the slow fiscal consolidation stems from the increasing subsidies, despite the strong 5.2% GDP growth forecast.

“The Government has plans to reform the subsidy systems and to introduce goods and service tax. But given the political sensitivity, we expect any implementation to be gradual,” the agency said.

- Reuters