The country’s economy continues to show resilience but falling revenue, low reserve and questions over institutional governance could pose a threat to Malaysia’s ratings, said Moody's Investors Service Inc.
The rating agency said it was maintaining its A3 rating and stable outlook for Malaysia based on the expected robust 4.3% economic growth for 2017-2018 and the country’s ability to maintain a current account surplus.
However, the rating agency said challenges still remain for Malaysia to maintain external stability due to the volatility of the currency and capital outflow.
Moody’s said despite the country’s reserve adequacy having improved slightly, it was still comparatively worse compared to other A-rated peers.
Malaysia’s current account surplus rose to RM12.2 billion in the fourth-quarter of 2016 (4Q16) from RM10.6 billion in 4Q15. It was the highest surplus since 2Q14.
Moody’s said the government has demonstrated its commitment to fiscal consolidation including seven consecutive years (2010-2016) of fiscal deficit reduction and prudent spending despite a weaker revenue generation.
Moody’s did not expect any significant change in reform momentum before the next elections due by May 2018.
However, if Malaysia crystallised large contingent liabilities, or if there is a greater deterioration in the balance of payments, it would result in further downward pressure on the rating.
Factors that could prompt a positive rating action include a greater convergence in government debt metrics with similarly rated peers, accompanied by improvements in debt affordability and a reduction in the fiscal deficit, Moody’s said.
Conversely, a negative rating action could result from a significant worsening in Malaysia’s debt dynamics or fiscal accounts, or an inability to manage the impact of external shocks on the real economy or the financial system, it added.
“We expect Malaysia to continue to grow faster than all other A-rated peers through 2020, because of its combination of well-developed infra- structure, substantial natural resources and the diversification and competitiveness of its economy,” Moody’s said.
IHS Markit Asia-Pacific chief economist Rajiv Biswas told The Malaysian Reserve (TMR) that the Malaysian economy is expected to stabilise in 2017-2018 to around 4.2% and a current account surplus of around 3% of the growth domestic product (GDP).
“Over the medium term outlook from 2019-2022, GDP growth is expected to strengthen to an average annual rate of 5% per year,” he said.
“The important take away from Moody’s highlight on possible negative rating action is for the government to be mindful on the proliferation of contingent liabilities.
“This could be a source of vulnerability to our existing rating if left unattended,” Bank Islam Malaysia Bhd chief economist Dr Mohd Afza- nizam Abdul Rashid told TMR.
“Therefore, it is paramount to perform a robust cost and benefit analysis for each public project in order to ensure that it will yield a desirable results to the community and also enhance the productivity level of the country,” he added.
The World Economic Forum’s 2016- 2017 Global Competitiveness Report placed Malaysia 25th out of 138 countries, a result which is lower than the 18th it garnered in the previous year, but higher than all other A-rated sovereigns except for Japan (A1 stable), Ireland (A3 positive) and Israel (A1 stable).
Moody’s said the diversification of the economy is supportive of Malaysia’s economic strength. In particular, its large services sector and well-developed manufacturing base, especially in electronics, have helped to offset the downturn in global prices for key commodity exports since 2014.
IHS Market data showed Malaysia’s manufacturing sector experiencing a pickup in momentum, helped by rapid growth in electrical and electronics exports which rose by 11% year-on-year in January.
Biswas said key growth drivers for the Malaysian economy include continued expansion in private consumption and strong growth in investment.
The investment outlook for 2017 is helped by the large number of infrastructure mega projects underway and the construction of the first phase of Petroliam Nasional Bhd’s Refinery and Petrochemical Integrated Development project, in which Saudi Arabian Oil Co has recently decided to acquire a US$7 billion (RM30.98 billion) stake.
Moody’s said Malaysia’s effective regulatory and markets governance, along with substantial long-term institutional savings, have enabled it to develop Asia’s third-largest local currency bond market after Japan and Korea, worth more than the country’s annual national output.
“As the world’s largest sukuk market, we regard Malaysia as having the most advanced regulatory, accounting and market infrastructure for Islamic finance,” said Moody’s.
Meanwhile, RAM Rating Services Bhd (RAM Ratings) reaffirmed the stable outlook on the Malaysian banking sector in its annual banking bulletin released yesterday.
The rating agency expected the banking sector to remain stable underpinned by detailed reviews of close to 50 Malaysian banks and non-bank financial institutions in the past year. Key forecasts for 2017 include flat loan growth of between 5% and 6%, while asset quality would hold up well with sturdy capital buffers in place.
RAM Ratings forecast healthy liquidity in the banking system amid sensitive funding environment, where earnings would remain pressured but sound.
“Looking ahead, we expect less currency volatility and some accumulation of foreign-exchange (forex) reserves, due to new forex administration rules that require exporters to convert at least 75% of their proceeds into ringgit,” said Moody’s.