Fitch downgrades Malaysia due to high government debts and spending

PETALING JAYA: Fitch Ratings, after cutting Malaysia’s credit rating outlook to “negative”, sending the stock market and the ringgit reeling, has said it is more likely to downgrade the country’s rating within the next two years on doubts over the Government’s ability to rein in its debt and spending.

The Government, in response to Bloomberg News, rebutted such concerns and said it was committed to fiscal responsibility, stressing that it would rationalise subsidies and broaden the tax base.

It said the economy was fundamentally healthy, with strong growth and foreign currency reserves.

Standard & Poor’s had last week, however, reaffirmed its credit rating on Malaysia and said it might raise sovereign credit ratings if stronger growth and the Government’s effort to reduce spending resulted in lower-than-expected deficits. “With lower deficits, a significant reduction in Government debt is possible,” it said.

It might lower its rating for Malaysia if the Government fails to deliver reform measures to reduce its fiscal deficits and increase the country’s growth prospects.

“These reforms may include implementing the Goods and Services Tax or GST, reducing subsidies, boosting private investments and diversifying the economy,” said S&P.

The downgrade in Malaysia’s rating outlook by Fitch on Tuesday took a toll on the capital markets, and sent the ringgit to a three-year low against the US dollar.

The FTSE Bursa Malaysia KL Composite Index closed 1.25% or 22.46 points lower at 1,772.62, and the ringgit fell to RM3.2425 against the greenback, its lowest since June 30, 2010.

The bond market, where foreign shareholding recently was at an all-time high, also saw yields climb dramatically. The yield for the 10-year tenure for Malaysian Government Securities rose seven basis points yesterday to 4.13%. The yield for the 10-year Government bond has climbed 77 basis points since April 30.

In a conference call yesterday afternoon, Fitch Ratings warned that a downgrade in Malaysia’s credit rating was “more likely than not” over the next 18 to 24 months. It highlighted Malaysia’s public finances as its key issue for the rating weakness.

Its head of Asia-Pacific sovereigns Andrew Colquhoun said over the phone that there was a concern over the Government’s commitment to fiscal consolidation after the May general election (GE).

“It is difficult to see the Government pressing forward with any fiscal reform steps or budget reforms,” he said, adding that the rating would reverse if any action was taken.

CIMB Research, in a note by its head of research Terence Wong and economics research head Lee Heng Guie, said Fitch’s revised outlook on the country was “bad news” for the stock market.

“While we believe there will be a knee-jerk selldown, the average lifespan for a rating outlook is about 18 to 24 months before a downgrade is enforced, giving Malaysia time to prevent that,” the report said.

They said the Fitch downgrade was a warning to Malaysia to improve its macroeconomic management, and was of the opinion that the Government had time to get its house in order.

“We believe the authorities will take the warning seriously and move to address any weaknesses,” they noted.

Both Wong and Lee, however, felt that any weakness in the stock market was an opportunity for investors to accumulate shares.

“The depreciation of the ringgit benefits exporters, such as plantation, rubber glove and semiconductor players, as well as those with foreign currency revenues,” they said.

Meanwhile, Areca Capital chief executive officer Danny Wong told StarBiz that foreign investors might use the downgrade as a reason to exit from Bursa Malaysia.

“There is a concern that the downgrading may affect foreigners to exit Malaysia in a big way. Hence, it created a ‘knee-jerk’ reaction to the market.

“However, I think the impact would be minimal on the equity market but the concern is on the bond market because of the 33% foreign ownership,” he said, adding that the outlook by Fitch was earlier than expected since the 2014 budget is set to be announced in two months’ time.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng said the cut in the outlook by Fitch had rattled the market, but feels the country’s fundamentals such as gross domestic product (GDP) growth, high foreign reserves and current account surplus would soothe worries over any rating concerns.

“I believe the Government will pursue its target to reduce the budget deficit by 4% this year, or at least show a sign of reduction.

“However, Malaysia’s current account balance will narrow further by end-2013 due to a weakening in exports, although a deficit account is unlikely to happen,” he opined.

High debt levels have been a growing concern in recent years in Malaysia, as the Government debt-to-GDP ratio is among the highest in South-East Asia. At 53.5% as at the end of last year, it is higher than the 25% in Indonesia, 51% in the Philippines and 43% in Thailand, noted a report by Bloomberg.

The ratio for Malaysia is almost to the debt ceiling limit of 55%.

Fitch, it its notes accompanying its decision to downgrade Malaysia’s credit outlook, said the country’s budget deficit had widened to 4.7% of GDP in 2012 from 3.8% in 2011, led by a 19% rise in spending on public wages ahead of the May GE.

It believes that it will be difficult for the Government to achieve its 3% deficit target for 2015 without additional consolidation measures.

By INTAN FARHANA ZAINUL intanzainul@thestar.com.my