Sovereign credit ratings expected to remain intact

Govt set to undertake mega spending spree to support economy

PETALING JAYA: Rating agencies expect Malaysia’s sovereign credit ratings to remain intact as the government is set to undertake a mega spending spree to support the flailing economy.

Many quarters have previously raised concerns about the government’s affordability to inject more stimulus into the economy, after Prime Minister Tan Sri Muhyiddin Yassin announced a massive economic stimulus package of Rm230bil on March 27.

This was the second stimulus package in response to the Covid-19-induced economic slowdown, with the first package announced by former prime minister Tun Dr Mahathir Mohamad valued at Rm20bil.

RAM Ratings Services Bhd CEO Chris Lee told Starbiz that the temporary lack of fiscal consolidation was not expected to trigger material rating actions in the immediate term, considering the current unprecedented global shock.

He also pointed out that while the total value of the stimulus packages accounted for around 17% of the gross domestic product (GDP), the government’s actual fiscal commitments amounted to much less – of about 1.7% of GDP.

“Taking into account this additional spending, as well as accounting for recalibration of spending allocations from the original Budget 2020 and expectations regarding both oil and non-oil related revenue impact this year, our fiscal deficit to GDP projection is more or less within the government’s revised expectation of 4%,” he said.

On the impact of the stimulus packages on the government’s indebtedness, Lee cautioned that debt levels would rise due to increased fiscal spending.

It will also give rise to concerns in the rising trend of debt service charges to revenue as well as debt to GDP, according to him.

“The key to whether this will become a concern, going ahead, will hinge on medium-term fiscal consolidation plans as well as the potential additional revenue-generating initiatives down the line, the ability of which will help decrease the strain on fiscal sustainability on account of the increased debt obligations,” he said.

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias also believes that Malaysia’s worsening fiscal and debt metrics will not trigger negative rating actions by global credit rating agencies.

“This is because Malaysia’s deficits are mainly financed by domestic resources.

“Also, history shows that during the last recession in 2009, Malaysia’s sovereign rating was unaffected even though its budget deficit had surged to 6.7% of GDP from 4.6% the previous year,” he said.

Nor Zahidi projects Malaysia’s fiscal deficit in 2020 to be one to two percentage points higher than the government’s recent estimate of 3.4%.

“We think the government has some room to partly finance this through debt issuances (another six percentage point leeway before it hits the self-imposed 55% of GDP limit).

“In addition, deficits could be partly financed through one-off dividends from government-linked companies and reallocations of some of expenditures previously planned for other purposes such as tourism activities,” he said.

Meanwhile, Moody’s Investors Service sovereign risk group assistant vice-president and analyst Christian Fang said the “one-off, temporary nature of the stimulus package” limited the scope for a substantial and sustained fiscal slippage, while providing some support to domestic demand.

Despite the government’s stimulus packages valued at Rm250bil, Fang pointed out that only around a tenth of the package would be directly funded by the government.

“However, Malaysia’s fiscal and credit profile remains susceptible to a sustained period of weak global demand and oil prices,” Fang told Starbiz.