Fitch pushes Malaysia’s credit rating outlook to negative

Global ratings agency Fitch Ratings has revised Malaysia's sovereign credit rating outlook from stable to negative as the possibility of addressing public finance weaknesses has deteriorated after Election 2013.

The news comes as the Malaysian ringgit slid to three-year lows against the US dollar and 15-year lows against the Singapore dollar, making imports more expensive while exports would be cheaper although exports have slipped.

But it affirmed the country's long-term foreign and local currency issuer default ratings at A- and A, respectively.

“Malaysia’s public finances are its key rating weakness. Federal government debt rose to 53.3% of gross domestic product (GDP) at end-2012, up from 51.6 percent at end-2011 and 39.8 percent at end-2008.

"The general government budget deficit (Fitch basis) widened to 4.7 percent of GDP in 2012 from 3.8 percent in 2011, led by a 19 percent rise in spending on public wages in a pre-election year,” it said.

But Fitch believed that it would be difficult for Putrajaya to achieve its interim 3 percent federal government deficit target for 2015 without additional consolidation measures.

“Fitch sees risks even to the achievement of the agency’s 3.5 percent deficit projection, as this already factors in one percentage point of GDP of spending cuts.

"This leaves Malaysia’s public finances more exposed to any future negative shock,” it said.

It pointed out that Putrajaya's contingent liabilities were on the rise and its debt guaranteed rose to 15.2 percent of GDP by end-2012 from 9.0 percent at end-2008, as state-owned enterprises (SoEs) participated in a government-led investment programme.

"Also, Malaysia's fiscal revenue base is low at 24.7 percent of GDP, against an 'A' range median of 32.8 percent. Fitch has long emphasised two key budgetary vulnerabilities: reliance on petroleum-derived revenues and the high and rising weight of subsidies in expenditure. Fitch estimated that petroleum-derived revenues contributed 33.7 percent of federal revenues in 2012," the ratings agency said.

"We believe the lack of progress on structural budgetary reform could be due to the general elections, resulting in the government delaying its reform. The situation was compounded by the Umno general election that has been set on October 5.

"Indeed, the government has since put on hold its subsidies rationalisation, after it last cut its fuel subsidies in December 2010. This was made worse by fiscal transfer in 2012 and 2013 to help ease people’s financial burden," Fitch said.

It pointed although the subsidies were projected to fall, it remained sizeable and accounts for 18 percent of the revenue in 2013 (+21.3 percent in 2012), which was still uncomfortably high.

"Way back in the early 2000s, the subsidies only accounted for 2.9-7.8 percent of revenue in 2000-2004, compared with an average of 18.0 percent a year in 2008-12.

"We expect the government to resume its fiscal reform once the Umno election is over. This may help to convince Fitch that the government is committed to bring down its budget deficit through fiscal reform including rationalisation of subsidies and implementation of the goods & services tax (GST) to broaden the government’s tax base," it said.

But it also affirmed the Short-Term Foreign Currency IDR at F2 and the Country Ceiling at A. Despite the weaknesses, the rating house also acknowledged the strengths in the composition of Malaysia’s debt and its funding base.

“Federal Government debt is overwhelmingly denominated in local currency (97 percent at end-2012) and has a smooth maturity profile.

"Sovereign funding conditions benefit from deep domestic capital markets and from the role of the broader public sector in funnelling savings to the Government,” it stated.

Fitch also said Malaysia’s credit fundamentals were weak by a range standards, as the average income level of US$10,400 (RM33,597) in 2012 was closer to the BBB range median of US$11,300 than the A median of US$18,600.

“Its overall level of development and standards of governance are also considered weak for its A- rating. Fitch’s Banking System Indicator of bbb suggests the standalone strength of Malaysian banks does not weigh on the credit profile.

However, Malaysia’s high level of private sector leverage is a risk from a credit perspective,” it said, pointing out it reached 118 percent of GDP at end-2012, above the 'A' median 94 percent.

Malaysia’s household debt also rose from a low of 60.4 percent in 2008 to 81.1 percent of GDP in 2012 and further to 82.9 percent in March 2013 but RHB Research said it was set to rise further given that household loans in the banking system continued to outpace the growth of GDP currently.