(AFP) International ratings agency Standard and Poor's on Thursday revised the outlook on Malaysia's long-term foreign currency rating from positive to stable, citing greater political and economic uncertainty.

The revision "indicates diminished prospects for a near-term upgrade" amid modest progress to reduce the unusually high budget deficit of 5.7 percent of gross domestic product (GDP) last year, it said.

"Greater political uncertainty, as Prime Minister Mahathir Mohamad's iron grip is loosened, and modest slippage in a still strong external position because of an unexpected decline in reserves, also restrain improvements in creditworthiness," it said in a statement.

The agency said Malaysia's ratings were supported by still-robust international liquidity and external positions, substantial fiscal flexibility and a resilient and open economy.

But they were constrained by a "highly centralised political system and increased political uncertainty," with institutions weakened by a reluctance to devolve decision-making power or to accommodate dissent.

"Increasing political and economic stress raise questions about the current policy environment even before Prime Minister Mahathir steps down," Standard and Poor's said.

Public objections

It also noted a risk to the public-sector balance sheet from support measures for the private sector and an "uncertain commitment" to transparent corporate governance.

"An unchecked political-business nexus raises moral hazard and could erode the government's financial position."

The agency said "off-budget bailouts" have added to fiscal pressures, with net public sector debt estimated to climb to 25 percent of GDP this year from six percent in 1993.

"Despite growing public objections to these bailouts, a centralised policy system and weak institutional checks maintain a high contingent risk for the government," it said.

The domestic economy remained weak with "unfinished structural and corporate reforms" despite further pump-priming efforts.

Standard and Poor's noted a fall in international reserves to 29 billion dollars at end-February, from 31 billion at end-1999, "when flows indicate a 10 billion dollar increase."

It said this suggested growing concern about "the political and policy environment" and about investment and growth prospects.

"In the absence of deep-rooted corporate restructuring, capital leakage likely will grow while foreign interest continues to wane."

The agency said the revised stable outlook "balances Malaysia's external strengths and fiscal flexibility against the limited commitment to market-based corporate practices."

Standard and Poor's affirmed all Malaysia's long and short-term ratings, including its BBB and A3 foreign currency ratings. The outlook on the local currency rating remained stable.