IF NAJIB LOSES US$6.5BIL IPIC ARBITRATION, THERE GOES THE RINGGIT: 1MDB ISSUES A ‘CONTINGENT LIABILITY’ ON NATION’S RATING, WARNS FITCH

KUALA LUMPUR – Fitch Ratings said Malaysia’s Budget 2017 signals a further stability in public finances, regardless of another expected fall in revenue from the oil and gas (O&G) sector.

However, it viewed the unresolved issues over 1Malaysia Development Bhd’s (1MDB) affairs as an indication that governance standards remain a weakness in Malaysia’s credit profile.

While it noted that the impact of 1MDB’s affairs on government policymaking, political stability and fiscal finances had been limited so far, it said the issue “remains a source of uncertainty”.

“Fitch views 1MDB as a close — if informal — contingent liability of the sovereign, and will be monitoring it for any discernible negative effects on Malaysia’s fiscal position. Its unresolved issues also illustrate how governance standards remain a weakness in Malaysia’s credit profile,” it said in a statement yesterday.

Meanwhile, it expected Malaysia’s 2016 deficit to come in at 3.2% of gross domestic product (GDP), one percentage point higher than Putrajaya’s 3.1% target. However, it believed the official deficit target of 3% in 2017 will be achievable.

“We believe it is unlikely that the [2017] target will be missed by enough to push public debt above the self-imposed ceiling of 55% of GDP. Fitch estimates that federal government debt will remain under 54% of GDP at end-2016,” it said in a statement.

The international rating agency also noted it had been keeping Malaysia’s sovereign rating at an “A-” rating, on a stable outlook since mid-2015, though the commodity price crashed since mid-2014.

Malaysia, it said, was better placed than many net commodity exporters to cope with the lingering effects of the negative shift in its terms of trade.

In contrast, it downgraded 31 emerging market sovereign ratings in 2015 and 2016 due to the dramatic fall in commodity prices.

Nevertheless, Malaysia, being the largest net exporter of petroleum and natural gas products in Southeast Asia, had not been immune to the effects of the collapse in prices, it noted.

Still, it noted that the country’s reasonably strong GDP growth had remained a credit strength despite the negative terms-of-trade shock, and helped stabilise its federal government deficit and debt levels.

“Capital expenditure has fallen in the O&G sector, particularly at Petronas, but the impact on GDP growth has been partly offset by increases in consumer spending. Household spending continues to be supported by a hike in public-sector salaries that took effect on July 1, and will receive another boost from a 26% increase in transfers to lower-income households included in the 2017 budget,” it said.

THE EDGE