International ratings agency Standard and Poor's today affirmed Malaysia's sovereign credit rating, citing its dynamic economy and strong external liquidity.

"The investment-grade ratings on Malaysia take into account its dynamic economy, strong external liquidity and public sector net external creditor position," said Philippe Sachs, credit analyst of the ratings agency.

"Nevetheless, these strengths are offset by general government deficits, relatively high general government net debt and substantial contingent liabilities," he added.

The outlook was stable on the ratings, A-minus/A-2 for foreign currency and A-plus/A-1 for local currency, the agency said.

Political stability, well-developed infrastructure and abundant natural resources underpinned Malaysia's competitive export-oriented and open economy, it said.

It said government policies were generally pragmatic, although a close relationship between the government and businesses had introduced inefficiencies.

Price inflation

A change in the ringgit peg was unlikely to undermine Malaysia's competitiveness or deplete its reserve cushion but it warned continued inflow of speculative money was leading to asset and overall price inflation and was beginning to complicate monetary policy.

Deputy Prime Minister Najib Razak said meanwhile Malaysia would maintain the currency's seven-year-old peg of RM3.80 to the dollar.

"Our position is clear. (The ringgit peg) remains, as it is, until the situation warrants a change," he was quoted as saying by the New Straits Times newspaper today.

Najib said the authorities would continue to monitor the flow of hot money into the country after speculation of a change in the peg. "No action will be taken for the time being," he added.

Sachs said if the government loosens its fiscal stance to spur growth or the economy slows materially resulting in a higher level of net debt, Malaysia's credit standing could come under pressure.

"Conversely, Malaysia's credit standing could improve, if stronger growth and efforts to rationalize spending result in lower-than-expected deficits and a reduction of government indebtedness," he said.