By Zhen M
Fitch Ratings last Tuesday downgraded Malaysia’s credit rating outlook to “negative” from “stable”, sending the stock market and the ringgit reeling. Never mind that Standard & Poor’s (S&P) had only five days before that maintained Malaysia’s long term outlook as “stable”. After all, the market tends to react more strongly to bad news. From some investors’ emotional states, fear is a more powerful emotion than greed.
Analysts believe that while a knee-jerk selldown is inevitable, the average lifespan for a rating outlook is about 18 to 24 months before a downgrade is enforced, giving Malaysia time to prevent that.
The downgrade serves as a warning to Malaysia to improve its macroeconomic management. Analysts believe that a rating downgrade could be averted if the government commenced with structural reforms to rein in the fiscal deficit and Government debt level by cutting back spending, rationalising subsidies and implementing the long delayed goods and services tax (GST).
It will have to be a two-pronged approach – increasing revenue while reducing expenditure, said Ambank Group chief economist Anthony Dass. “If the Government focuses only on increasing revenue, then the process of bringing down the deficit will take longer.”
RAM Holdings Bhd chief economist Dr Yeah Kim Leng noted that Malaysia had stood by its timetable on reducing the country’s fiscal deficit. That, coupled with improved external economy, “would already put us in good stead, although Fitch would keep us vigilant in fulfilling our obligations”.
Yeah said there is also evidence of improvements in the US and the Japanese economies, which is likely to impact positively on the Malaysian economy. In addition, the domestic economy also looks vibrant and would likely be able to offset any possible slowdown in the external factors.
To recap, Fitch Ratings had on July 30 revised Malaysia’s outlook to “negative” from “stable”, with Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) affirmed at A- and A, respectively. Fitch said the revision reflected its assessment that prospects for budgetary reform and fiscal consolidation to address weaknesses in public finances had worsened since the Government’s weak showing in May’s General Elections.
“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% at end-2011 and 39.8% at end-2008. The general government budget deficit (Fitch basis) widened to 4.7% of GDP in 2012 from 3.8% in 2011, led by a 19% rise in spending on public wages in a pre-election year,” it said.
It believed that it would be difficult for the Government to achieve its interim 3% Federal Government deficit target for 2015 without additional consolidation measures and warned that a downgrade in Malaysia’s credit rating was “more likely than not” over the next 18-24 months.
Only five days before that, S&P had reaffirmed its credit rating on Malaysia and said it might raise sovereign credit ratings if stronger growth and the Government’s effort to reduce spending resulted in lower-than-expected deficits. “With lower deficits, a significant reduction in Government debt is possible,” it said.
It said it might, however, lower Malaysia’s rating if the Government fails to deliver reform measures to reduce its fiscal deficits and increase the country’s growth prospects, such as implementing GST, reducing subsidies, boosting private investments and diversifying the economy.
S&P is reportedly heading to Malaysia in September for a ratings review exercise. Meanwhile, Moody’s has not shown any indication of reviewing its ratings on Malaysia.
Malaysia’s high debt levels have been a growing concern in recent years as its Government debt-to-GDP ratio is among the highest in South-East Asia. At 53.5% as at end-2012, it is higher than the 25% in Indonesia, 51% in the Philippines and 43% in Thailand. The ratio for Malaysia is almost to the debt ceiling limit of 55%.
As such, many analysts view the decision by Fitch as “no surprise”.
“We had been expecting one of the rating agencies to downgrade Malaysia from stable to negative since last year. That S&P affirmed its rating did not mean we had escaped…” shared Dass.
Responding to the downgrade, Prime Minister Datuk Seri Najib Razak said: “We are looking at various policy options and the details will be unveiled shortly in the forthcoming budget (to be tabled on October 25).”
Najib stressed that the revision by Fitch was only with regard to the outlook. That the rating agency has “reaffirmed our current rating is something positive”.