Credit ratings agency Moody's sees Malaysia's political risk to be 'very low' despite the 1MDB and RM2.6 billion scandals as it expects the BN government to remain in power at least until 2018.

"Notwithstanding the events surrounding 1MDB, our assessment of domestic political risk in Malaysia remains at 'very low', reflecting our expectation of de facto one party dominance and, consequently, policy continuity.”

Moody's said this in its report on political risks in Southeast Asian countries, published yesterday.

It noted that the 1MDB and RM2.6 billion scandals had increased the ‘political noise’ since the start of the year.

However, it said opposition coalition Pakatan Harapan had yet to prove that it was capable of mounting a credible challenge against the BN government.

It added that the opposition also did not have the numbers to succeed in a no-confidence vote against Prime Minister Najib Abdul Razak.

"As we expect BN to remain in government at least until the next elections, the key source of political uncertainty is currently the struggle for power within Umno," said the agency.

While noting there were calls from prominent Umno leaders for Najib to resign, it said a splintering of Umno was unlikely.

The continuation of an Umno-led government, regardless of who holds the position of prime minister, should ensure stability in economic policy as spelled out in the latest five-year plan that was unveiled earlier in 2015, it said.

Political will

Moody explained its positive outlook on Malaysia was due to the political will to sustain the trend of fiscal consolidation that the country initiated since 2010.

‘In the wake of losing its popular mandate in the 2013 election, fiscal reform actually accelerated with the government announcing its decision to implement the Goods and Services Tax during the Budget 2014 announcement in October 2013.

"It also effectively removed fuel subsidies when global oil prices fell last year," said the report.

Moody's acknowledged that the 1MDB scandal posed a serious challenge to the county's political leadership and economic conditions are further weighing on sentiments.

Despite this, it said Putrajaya had indicated its continuing commitment to keep the fiscal deficit under control and further reduce reliance on oil revenue.

However, it said new measures such as the reduction of highway and rice subsidies will likely further weigh on Najib's support.

"An escalation of political tensions could aggravate the government’s consolidation agenda, especially ahead of planned elections in 2018," it said.