Fitch Ratings has affirmed Malaysia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-' with a stable outlook supported by solid economic growth and a net external creditor position built up from a record of current account surpluses.
It said the affirmation not only takes into consideration measures such as the rollback of the goods and services tax (GST), but also the stated intention to reduce fiscal deficits and improve governance.
“The agency has raised its estimate of central government debt at end-2017 to around 65 percent of Gross Domestic Product (GDP), from 50.8 percent, following the government's recognition that it will need to service a large share of explicitly guaranteed debt,” it said in a statement, today.
This estimate, however, may be further revised as more details become available, it added. The Pakatan Harapan coalition, which won the May 2018 election, has moved ahead on many of its key election promises, notably repealing the GST. It also plans to continue fuel subsidies in place since early 2018, although they will be made more targeted.
“Fitch views these measures as negative for the credit profile. However, the government aims to implement offsetting fiscal measures and has indicated its intention to contain the central government deficit.”
The rating agency acknowledged that there are risks to achieving this target, such as the lower-than-Fitch-expected growth - which could limit room for expenditure cutbacks - as well as delays in implementing planned revenue measures.
“The authorities expect to meet the original budget deficit target of 2.8 percent of GDP for 2018 through offsetting measures, including a review of large infrastructure projects and the reintroduction of the sales and services tax with full-year revenue of 1.6 percent of GDP that had been replaced by the GST (full-year revenue of three percent of GDP) under the previous government.”
The authorities also expect additional oil revenue of 0.4 percent of GDP due to higher global oil prices and dividends from government-linked enterprises providing an additional 0.3 percent of GDP in revenue.
On the expenditure side, the government plans to cut operational and development spending by RM10 billion (0.7 percent of GDP) in 2018.
“We expect the deficit to continue falling to around 2.5 percent of GDP by 2020 under our baseline assumptions through a combination of subsidy rationalisation, further capital spending cuts, new revenue measures and better tax compliance.”
It said the central government debt is likely to decline to around 59 percent of GDP by 2020, although the decline could be more rapid if it chooses to sell off public assets and use the proceeds for debt reduction.
As for GDP, Fitch said it expects GDP growth to slow to 5.2 percent in 2018, 4.8 percent in 2019 and 4.6 percent in 2020, from 5.9 percent in 2017, as the government seeks to constrain recurrent spending in line with its narrower revenue base.
In addition, public capital spending is being held back by a review of large infrastructure projects and exports are likely to moderate from slowing external demand.
“However, Malaysia's average GDP growth for the five years to 2018 will remain above peer medians. Downside risks to our growth projections could materialise from accelerated spending cuts, disruption to capital projects or slowing investment in the event of prolonged policy and political uncertainty,” it said.
On other developments, it said intervention by the country’s central bank, Bank Negara Malaysia (BNM), to smooth currency volatility in the midst of large capital outflows between April and June 2018, contributed to a decline in foreign exchange reserves of about US$5 billion to US$105 billion as of end-June-2018.
“We expect BNM to limit its intervention and allow sufficient currency flexibility to preserve foreign exchange reserves at a reasonably healthy level of around five months of current external payments. Although short-term external debt is high, foreign exchange reserves continue to cover over 100 percent of this debt.”
Fitch expects Malaysia's current account surplus to remain between 3.0 percent and 4.0 percent of GDP between 2018 and 2020, supported by higher oil-related exports and slightly slower import growth, which should counter its forecast moderation in exports of electronics.
Imports are likely to slow from the new government's review of major infrastructure projects.
However, given Malaysia's high degree of trade openness, it remains vulnerable to negative external developments, such as rising trade protectionism, it said.
Banking soundness indicators remain steady, with a system-wide common equity Tier 1 ratio of 12.7 percent and liquidity coverage ratio of 140 percent continuing to indicate adequate capital and liquidity buffers.
“Pockets of risk remain within certain over-supplied property sub-segments, highly leveraged lower-income households and high corporate debt. However, household credit growth has eased over the last few years, and we expect the banking sector to be resilient in case of a moderate correction in the property market,” it added.