Malaysia risks downgrade if debt burden increases, says Moody’s

PETALING JAYA: International rating agency Moody’s says Malaysia’s current A3 stable rating could be threatened if the government’s debt obligation increases.

“We would consider downgrading the rating if Malaysia’s fiscal prospects weaken, or its debt burden increases,” it said in its annual analysis of the country’s credit rating.

It added however that Malaysia’s A3 stable credit profile reflected a large and diversified economy with healthy medium-term growth prospects.

“The relatively high government debt is partly offset by a favourable debt structure and large domestic savings,” it said.

This follows the transfer of federal power to a new government following the 14th general election in May last year. It marked the country’s first transition away from Barisan Nasional, which had ruled Malaysia since independence.

The Pakatan Harapan administration had signalled a significant shift in policy priorities, some of which are expected to affect the country’s credit profile.

Moody’s said it expects real GDP growth to slow to 4.7% and 4.5% in 2019 and 2020 respectively, after averaging around 5.0% from 2015 to 2018. The rating agency said external headwinds from trade protectionism would weigh on trade activity, while a review of infrastructure projects and slowing public spending would be a further drag on growth.

Moody’s also said the new government’s fiscal policy choices, particularly the move to abolish the goods and services tax (GST), would narrow its revenue base and reduce fiscal flexibility. Malaysia’s debt burden, which is significantly higher than the A-rated median, is also expected to remain a credit constraint.

The rating agency sounded a caution on pervasive corruption which it said was likely to remain a challenge for the government.

Downward rating pressures could also arise if growing political tensions and diverging views within the government undermine the effectiveness of policies or impair the government’s ability to adhere to its fiscal consolidation objectives, and/or threaten the stability of capital flows to Malaysia.

The moderation in growth incorporates the cancellation or postponement of several infrastructure projects and slowing domestic public spending, it said. Continued trade tensions between China and the US will also weigh on the growth outlook, given the large share of trade in the overall economy.

Moody’s said the Malaysian economy had transformed since the early 1980s, moving away from a reliance on commodities. Diversification has been both horizontal, away from primary sectors to manufacturing and services, and vertical through a move into high value-added activities, which has reduced commodities’ share of exports.

Some of the fiscal policies that the new government has implemented are expected to undermine its policy effectiveness. Abolishing the GST will have a long-lasting impact on revenue collection in terms of both magnitude and quality, while also increasing Malaysia’s reliance on more volatile oil-related revenue.

Partly because of these policy choices, a steady path of deficit reduction has been disrupted. Future consolidation will be more difficult to implement with an eroding revenue base, particularly in a weaker global environment, it said. -FMT