Standard and Poor's today said it has raised its long-term foreign currency sovereign credit rating on Malaysia to A-minus from BBB-plus to reflect its better-than-expected fiscal performance and a smooth leadership transition process.

At the same time, the international ratings agency affirmed its short-term foreign currency rating of A-2, and both the long- and short-term local currency ratings of A-plus/A-1 on Malaysia, with a stable outlook.

The general government deficit for 2003 is now forecast to be 4.4 percent of Gross Domestic Product (GDP), significantly lower than S and P's earlier projection of 6.10 percent of GDP, it added.

The government has demonstrated its commitment to fiscal consolidation, it said, by announcing a lower deficit target of 3.30 percent of GDP for 2004, even though it has to contest a general election before January 2005.

"While the 2004 fiscal target appears overly optimistic, indeed we would not be surprised to see an outcome closer to 4.2 percent of GDP, the trend of narrowing deficits is expected to continue," S and P credit analyst Chih Wai Liew said, adding the agency expects to see a small surplus after 2007.

Consultative approach

Malaysia's leadership transition is progressing well, with little, if any, disruption to government policies, Liew said, noting that Deputy Prime Minister Abdullah Ahmad Badawi is scheduled to take over the premiership from Prime Minister Dr Mahathir Mohamad officially on Oct 31 following Mahathir's retirement.

"Abdullah is expected largely to continue with the policy direction set under Mahathir's administration, although the incoming premier is likely to adopt a more consultative approach to policy-making."

Malaysia's investment-grade ratings are supported by its significant external liquidity, Liew said.

With another year of current account surplus, central bank foreign reserves should exceed 39 billion dollars by year-end, sufficient to finance more than four-and-a-half months of imports and representing 211 percent of the country's external debt servicing requirements in 2003, including short-term external debt.

"With the current account expected to remain in surplus, Malaysia's foreign reserves should continue to increase over the near- to medium-term" said Liew. - AFP