Eye on Malaysia’s ratings after IMF warns of recession
KUCHING: Sovereign ratings agencies will keep a close eye on Malaysia, analysts say, as the country manoeuvres a possible recession this year as forewarned by the International Monetary Fund (IMF).
The funs in its latest issue of the World Economic Outlook projected that the global economy will contract sharply by three per cent in 2020, which is far worse and more severe economic recession than the Global Financial Crisis a decade ago.
IMF cautioned risks to the outlook are still on the downside even after the severe downgrade to global growth.
It guided that the Covid-19 pandemic is having a severe impact on global economic activity amid the reduction in labour supply, quarantines and regional lockdowns, that have restricted movements and affected sectors such as travel, hospitality, entertainment and tourism.
Meanwhile, the closure of workplaces has resulted in a disruption of supply chains and lower productivity while layoffs, decline in incomes and increased uncertainty have dampened spending and spending leading to business closures and job losses.
“We believe this may prompt IMF to make further downward revisions to global Gross Domestic Product (GDP) growth forecast in 2020 and possibly next year,” said analysts at Affin Hwang Investment Bank Bhd (AffinHwang Capital) yesterday.
“We believe that no emerging markets, including Malaysia, can escape the downside risks of global recession this year, as advanced economies fall into recession.”
Before the release of the IMF report, the Malaysian government had already scaled down the macroeconomic forecasts for this year, where the official annual GDP growth forecast was lowered to minus two per cent to 0.5 per cent by BNM, sharply lower than the official’s earlier projection of 3.2 to 4.2 per cent.
“In the months ahead, we believe sovereign rating agencies will continue to monitor Malaysia’s macroeconomic developments, focusing on the country’s economic growth, fiscal deficit and government debt, from the impact of Covid-19 and low global oil price,” AffinHwang Capital added.
“We believe that improving on Malaysia’s economic fundamental will likely be the best option to ensure that country’s sovereign rating outlook be kept as stable by international rating agencies.”
Apart from better Malaysia’s external finances and supporting medium-term economic growth prospects), the analysts said there is a need for pragmatic measures on the tax and expenditure programme to improve on the government’s budgetary position, and to remain committed towards fiscal discipline and consolidation.
“The Finance Minister gave some assurance that the stimulus packages introduced in 2020 is expected to be one-off, where the fiscal consolidation efforts will continue once the health and economic conditions stabilise.
“As such, despite the challenging macro environment, we believe meeting the fiscal deficit target would help the government to build a solid reputation for fiscal discipline and prudence.
“This is especially necessary after the downgrade of Malaysia’s sovereign credit outlook from stable to negative by Fitch Ratings.”
Fitch Ratings last Friday reaffirmed Malaysia’s rating at A- but lowered the outlook to negative from stable.
The agency took a view that the economic impact from COVID-19 pandemic is likely to be significant and there remains a high level of uncertainty on both the growth outlook and public finances, given downside risks to revenue and a higher need for fiscal spending to cushion the economic fallout.
The team at Maybank Investment Bank Bhd (Maybank IB Research) said this negative action did not come as a surprise to them.
“We have viewed Fitch as more likely than Moody’s and S&P to place Malaysia on negative watch, largely because of its sovereign rating model ( SRM) output that had given Malaysia a BBB+ output since March 2018.
“Interestingly, Fitch indicates that its SRM now assigns Malaysia a score equivalent to Aand the rating committee didn’t not adjust the SRM output, and yet the outlook is revised to negative.
“This, again, exemplifies the point we mentioned repeatedly that judgemental call dictates rating outlook.”