Published on 16 Jan 2020.
RAM Ratings has reaffirmed Malaysia’s sovereign ratings of gA2/stable/gP1, seaAAA/stable/seaP1 and AAA/stable/P1 on the global, ASEAN and domestic scales, respectively. “The ratings reflect the country’s resilient economic growth, sound external position and improvements in various governance indicators,” highlights Esther Lai, RAM’s Head of Sovereign Ratings. Malaysia’s high government debt level and reduced fiscal space are rating concerns.
Growth is expected to remain resilient, albeit slower, at 4.5% in 2020 (2019 estimate: 4.6%) as a supportive policy stance will ensure continued domestic demand growth, offsetting external pressures. The Government’s recently introduced Shared Prosperity Vision 2030 and incremental labour market reforms represent a reprioritisation of equitable development as a long-term policy focus. This policy goal, if properly executed, would sustain domestic demand growth.
Malaysia’s external position is sound, given its track record of sustaining current account surpluses despite sluggish global growth, highlighting the country’s export competitiveness and diversified export structure. Moreover, sizeable domestic savings and adequate foreign reserves provide a significant buffer against sudden capital outflows. Nevertheless, higher capital imports due to the recent resumption of large infrastructure projects, global trade outlook uncertainties and possible weaknesses in the prices of key commodities are primary risks to Malaysia’s near-term external performance.
Malaysia’s governance indicators saw broadbased improvement in the first year of Pakatan Harapan’s administration – in line with the party’s election pledge of institutional reforms. Reforms such as the widespread use of open tenders for government procurement and ongoing efforts to reduce the cost of existing projects may yield fiscal benefits over time. While recent initiatives to improve the transparency of public agencies had added to the Government’s fiscal burden over the past year, they have reinforced an investor perception of a more accountable policy environment.
Effective government debt – which RAM defines as on-balance sheet debts and debts the Government is committed to servicing – is elevated at an estimated 68.7% of GDP by end-2019 and is a rating concern. Notably, the servicing cost of on-balance sheet debts, projected at 14.6% of fiscal revenues for 2020 (2018:13.1%), is higher relative to regional peers’ and nears the administrative limit of 15.0%. Further, sizeable committed debts scheduled to mature in 2022 and 2023 present a significant fiscal risk, if not properly managed.
RAM estimates Malaysia’s fiscal deficit at 3.3% of GDP in 2020, slightly wider than the Government’s expectations of 3.2% as our more conservative growth projection and lower oil price assumption weigh on our fiscal revenue forecast. A weaker revenue performance would markedly narrow Malaysia’s meagre fiscal space in view of existing budgetary rules. Over the long term, Malaysia’s fiscal position would likely improve due to new revenue measures, better expenditure control and ongoing enhancements to tax administration.
Malaysia’s ratings could be upgraded if its fiscal revenue profile improves and if debt and debt service costs are contained. Conversely, deterioration of the country’s fiscal performance due to a lack of sustainable revenue measures and a prolonged current account deficit would be credit negative. Rising policy uncertainties, exacerbated by social pressures and political developments, that materially impact the long-term fiscal profile and growth outlook would also weigh on the ratings.
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