RISK OF DOWNGRADE ‘REMOTE’
Malaysia supported by well-capitalised and highly liquid banking system, as well as current account surplus, say economists
THE risk of sovereign rating downgrades by global rating agencies on Malaysia is remote for now, say local economists. The country’s well-capitalised and highly liquid banking system and the current account surplus should support its sovereign ratings, they added.
According to Bank Negara Malaysia, local banks had excess liquidity of RM156.2 billion in the first half of last year.
In addition, the government’s institutional reforms, such as efforts to eradicate corruption, were good for the country’s longterm sustainability, they said.
The economists were responding to Japanese bank Nomura’s view that the government’s lack of “significant reform push” could lead to a worsening fiscal position and a possible slip in credit ratings.
Nomura expects Malaysia’s fiscal deficit to widen to 3.9 per cent of gross domestic product last year and 3.7 per cent this year, higher than the government’s estimates of 3.7 and 3.4 per cent, respectively.
The bank’s call followed a similar view by Singapore bank DBS, which in a Monday report raised concerns about potential deterioration in Malaysia’s finances.
Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said such pessimism was in line with the current global economic health .
“The reports represent their opinions and they might have a different angle when assessing Malaysian economy. It’s never a one-size-fits-all view. We have seen business sentiment as indicated by the global PMI (Purchasing Managers Index) decline. The discussions between the United States and China are still fluid although mid-level talks had been quite promising.
“Similarly, the Brexit deal could potentially affect market sentiment as we move closer to its March 29 deadline.
“Therefore, multiple events and indicators could sway people’s opinion about our economy,” Afzanizam told NST Business yesterday.
Despite the fiscal challenges, he said the recent decline in Malaysia’s five-year Credit Default Swap spread to 100 basis points (bps) from 110 bps at the end of last year suggested that the perception over the government’s credit worthiness was positive.
MIDF Amanah Investment Bank Bhd head of research Redza Rahman said Nomura had identified crude oil dependency as one of the causes for a possible worsening of Malaysia’s fiscal position, particularly when the benchmark Brent hit below US$55 per barrel in the final quarter of last year.
However, he noted that direct contribution from petroleumrelated revenues to the government coffers had declined over the years. This year, less than eight per cent of government revenues were from petroleum income tax.
Additionally, Redza believes that oil prices would rebound from the current level. The Brent has since recovered to around US$61 per barrel.
“Sustained global demand and supply control measures are expected to boost average crude prices to US$75 per barrel in 2019,” he said.
Redza said the recovery was positive to the government coffers and would reduce the risk of rating downgrades. Furthermore, the Organisation of the Petroleum Exporting Countries is slated to cut output by 1.2 million barrels a day this month.
Another factor that would support the price was the depreciating US dollar whereby the US Dollar Index (USDX) — which measures the dollar’s value against a basket of major currencies — had eased from the 97 level seen in November to 95 in recent days. This, he said, had a direct impact on the ringgit, which has strengthened from 4.20 to 4.10.
Moody’s current outlook for Malaysia’s “A3” rating is “stable”, which means a change in the near term is unlikely. Fitch Ratings and Standard and Poor’s also have a “stable” outlook attached with their credit ratings for Malaysia.