RAM: Slowdown won’t affect sovereign ratings
PETALING JAYA: The expected slowdown in Malaysia’s economy is unlikely to affect the country’s sovereign ratings, according to RAM Ratings.
The rating agency’s head of sovereign ratings, Esther Lai, described the impact from the projected moderation in economic growth as “transitory rather than structural”.
RAM Ratings expects the Malaysian economy to grow at a slower pace than last year, notably 4.9% in 2018 and 4.5% to 5% next year. In comparison, the country recorded a gross domestic product (GDP) growth of 5.9% in 2017.
“The country’s economic fundamentals have traditionally been a key rating strength, and remain so. On the other hand, the government’s plans and ability to stem any deterioration in its fiscal position will be crucial to its ratings in the medium term,” said Lai.
Currently, the rating agency has assigned a “gA2” sovereign rating on Malaysia, with a “stable” outlook.
In its latest report titled CreditPulse 2018/2019: Sector Outlooks & Credit Trends, RAM Ratings said the spillover effects of the US-China trade war, along with less infrastructure investment and lower public-sector spending in the near term, were among the prime reasons for the expected slower GDP growth.
It also said that while there has not been any significant weakness in Malaysia’s exports to date due to the ongoing trade war, the moderation in exports growth could become more pronounced, moving forward.
This is primarily because of Malaysia’s active participation in the global value chain due to its forward and backward linkages on both sides of the trade war divide.
On sectoral prospects, RAM Ratings is negative on four sectors – automotive, construction, media, and oil and gas (O&G) support services, as well as commercial property.
“The outlook on these four has remained unchanged from a year ago, and reflect uncertainties for the automotive sector, persistent oversupply of office and retail space and the structural shift in the delivery and consumption of content in the media sector.
“Meanwhile, the negative outlook for the O&G support services sector has been maintained, as we expect still-slow activity and poor charter rates to continue dragging earnings, even as oil prices are on the up,” it said in the report.
On the other hand, RAM Ratings has assigned a “stable” outlook on several other sectors, namely, retail, plantations and residential property.
The outlook on the retail sector has been revised upward from negative, driven by more upbeat consumer sentiment and the introduction of consumer-friendly measures.
It is worth noting that the MIER Consumer Sentiment Index broke above 100 points in the second quarter of 2018 and stayed above the 100-point mark in the subsequent quarter – after having been submerged for 15 consecutive quarters.
RAM Ratings foresees the country’s retail sales increasing by 3% to 4% in 2018 and 2019, following the growth of less than 2% over the past three years.
“Meanwhile, the stable outlook on the two remaining sectors covered by CreditPulse 2018/2019 (oil palm plantations and residential property) stays unchanged from a year ago. In a nutshell, both markets seem to have bottomed out.
“We expect crude palm oil prices to average RM2,300 to RM2,500 per tonne in 2018 and 2019, while residential property transactions should remain flat to mildly positive, after two years of decline.
“That said, clear policy direction will be key to the latter vis-à-vis addressing longer-term structural issues such as housing affordability, access to financing and the property overhang,” it said.
On the benchmark overnight policy rate, RAM Ratings expects it to remain unchanged at 3.25% at the moment and remain supportive of growth.
It also said that Bank Negara would likely remain relatively dovish, especially given the limited fiscal space to adequately counter a significant weakness in growth.
“Domestic monetary policy will remain a key challenge in 2019, as the country grapples with balancing the opposing pressures of growth deceleration and capital outflow bias.
“Although headline inflation is expected to accelerate to 1.7% to 2.5% from the (expected) benign 1.3% in 2018, it is still rather nondescript as a trigger point for interest rate moves,” it said.