Strong fundamentals driving positive outlook for Malaysia

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On economic fundamentals, Moody's expects Malaysia to continue to exhibit faster growth, lower inflation and a more robust external payments (current account in Balance of Payments) position than other A-rated countries. On economic fundamentals, Moody's expects Malaysia to continue to exhibit faster growth, lower inflation and a more robust external payments (current account in Balance of Payments) position than other A-rated countries. On economic fundamentals, Moody’s expects Malaysia to continue to exhibit faster growth, lower inflation and a more robust external payments (current account in Balance of Payments) position than other A-rated countries.

With us entering the second month of 2015, for various reasons, there has been sentiment that Malaysia’s economy may have a troubled outlook. However, it is important to know exactly what form of rating you are looking at, and not just assume the first negative report you have in hand is accurate.

Ratings agencies such as Moody’s, Standard & Poor’s and Fitch rate many things, from a country’s sovereign credit all the way down to bond issuances at bank level.

Malaysia’s government bonds have been very recently reaffirmed by Moody’s as A3, with a positive outlook. The “A” rating shows Malaysian government bonds (the instruments by which our government raises money) are considered upper-medium grade and is subject to low credit risk. Positive outlook means that it is very likely that there will be a rating upgrade over the medium term of 12 to 18 months.

At this point of time, all three major global rating agencies have Malaysia at A3/A- but with different outlooks. Moody’s is Positive, S&P Stable and Fitch Negative. At A3/A-, Malaysia has the second highest credit rating in ASEAN after Singapore (AAA), one notch above Thailand (Baa1), two notches above Philippines (Baa2) and three notches above Indonesia (Baa3). Brunei is not rated. Other ASEAN countries are below Baa3, which is the minimum level considered to be investment grade.

Here it should be mentioned that Moody’s is positive on Malaysia due multiple reasons, the main current basis of which is the government’s commitment to fiscal deficit reduction and reforms, as well as fundamental credit strengths. These strengths have been proven in the form of macroeconomic stability, domestic capital market depth and favourable government debt structure.

Malaysia has already shown the effectiveness of policy response in the year ahead to challenges that have struck global economies, such as lower global crude oil prices and lacklustre global economic growth. Other challenges include the normalization of interest rates by the US Federal Reserve, also influencing the future trajectory of Malaysia’s sovereign rating.

This provides resistance to a more adverse external economic environment, lower oil prices and global financial market volatility. Moody’s acknowledged they have seen ongoing fiscal deficit reduction and actual implementation of significant reform.

This includes, among others, the managed float system for petrol and diesel in Dec 2014 that effectively eliminated subsidies, reduced government reliance on oil revenues to 30% in 2014 and implementation of GST come 1 April 2015 which will broaden our revenue base.

On economic fundamentals, Moody’s expects Malaysia to continue to exhibit faster growth, lower inflation and a more robust external payments (current account in Balance of Payments) position than other A-rated countries.

Other strengths include favourable demographics, resurgence of private investment, macroenonomic stability anchored by credibility of Bank Negara Malaysia and the government’s favourable debt structure and depth of onshore capital markets. Only 3% of government debt is denominated in foreign currency.

Firstly, Malaysia has a high level of household debt, but this is thankfully mitigated by low unemployment and a high level of household financial assets. Secondly is the country’s external payments position, but Moody’s believes that Malaysia is likely to sustain a structural current account surplus and that foreign currency reserve adequacy will remain in line with other A-rated countries. Thirdly, there is some doubt on off-budget financing entities to analyse contingent risks to the government.

Notwithstanding concerns, the overall positive outlook reflects confidence that fiscal consolidation will be sustained despite prolonged low commodity prices.

How Malaysian corporates can help the national economy

If Malaysia continues along the path of fiscal deficit reduction and maintains stability in the affordability and refinancing of government debt, it is likely that our rating will go up. Inversely, should the fiscal deficit broaden, or other major liabilities crop up, the rating may go down.

To assist in strengthening the national economy, Malaysian corporates should optimise expenditure and go local where possible. Likewise, domestic investment is also much looked forward to. If local corporates are willing to share profits with employees, they in turn will have stronger spending power and stimulate the economy.

While these activities do not necessarily mean strength in business, it should be noted that corporates have social responsibilities as well. Do not avoid taxation, avoid corruption, and embrace inclusiveness and sustainability for a better Malaysia in 2015 and beyond.

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