International ratings agency Standard and Poor's affirmed Tuesday Malaysia's investment-grade sovereign credit ratings, citing its strong external liquidity and competitive export-oriented economy.

The outlook is stable on the ratings, A-minus/A-2 for foreign currency and A-plus/A-1 for local currency, it said in a statement.

"Malaysia's investment-grade ratings are supported by its strong external liquidity, although this is balanced against its relatively high and growing general government debt," said credit analyst Chih Wai Liew.

"With foreign reserves expected to continue rising, Malaysia's external liquidity will remain strong. The ratings are also supported by Malaysia's competitive export-oriented and open economy," Liew said.

Corporate and financial sector restructuring has boosted the economy's resilience to shocks and the "relatively more transparent decision-making process" of Prime Minister Abdullah Ahmad Badawi has improved Malaysia's overall business environment, he said.

Malaysia's credit standing could improve if Abdullah utilises his strong electoral mandate to pursue his reform agenda, including tackling corruption and increasing transparency in government decisions, he added.

Abdullah took over as premier from Mahathir Mohamad who retired last October after 22 years in power. His ruling National Front won a landslide victory in a March 21 vote.

Constrained by fiscal position

Liew warned, however, that Malaysia's credit standing is constrained by its fiscal position, with government debt rising to 48 percent of gross domestic product in 2003, from a low of 20 percent in 1996, after six years of budget deficits.

SP said the stable outlook reflects its expectation that the government would gradually consolidate its fiscal position towards a small surplus of 0.3 percent by 2008, as the private sector increasingly drives growth.

Liew warned Malaysia's creditworthiness could come under pressure if the government further loosened its fiscal stance to spur growth.

"Additional fiscal stimulus, geared to sustaining growth, will produce larger deficits and higher net debt. At the same time, the private sector could become dependent on government spending, thereby making it more difficult to reduce fiscal deficits," he added. - AFP