Malaysia's sound economic fundamental remains supportive to rating profile: economists

BY  | FROM  | 2018-05-28 10:20
While high debt burden has become a challenge for the new Malaysian government, economists believe the country's strong macro fundamentals and external finances will continue to support its rating profile.

"It is unlikely that international rating agencies will adjust on Malaysia's sovereign rating outlook to negative (from stable) in the near to medium term," said Affin Hwang Capital in a report Friday, citing Malaysia's improving economic outlook, sustainable current account surpluses, and steady increase in foreign exchange reserves.

Malaysian Ministry of Finance on Thursday confirmed that the federal government debt and liabilities account for 80.3 percent of Malaysia's Gross Domestic Product (GDP) as of December, 2017.

The debt burden has raised concerns of ratings downgrade when some rating agencies have already warned that the country might not able to achieve its deficit target this year after the abolishment of the 6-percent Goods and Services Tax (GST).

Affin Hwang Capital, however, noted that a majority of the government guarantees debts are borne by government-linked companies and statutory bodies, which may have their own source of revenue to serve their debt obligations.

Besides, an advisory council set up by Malaysian new government has earlier met with the three key sovereign rating agencies, Moody's Investors Service, S&P Global Ratings and Fitch Ratings, to explain on the country's fiscal deficit position.

Affin Hwang Capital also believes that the new government is able to improve on its fiscal position going forward, and remains committed toward fiscal discipline and consolidation.

The new Malaysian government has indicated earlier that it is confident on its economic reform. It has recently announced several measures to cut the government expenditures, such as a 10-percent pay cut for ministers and downsizing public sector.

The GST removal, which will be effective next month, will also be replaced by a 10-percent sales and services tax that will be re-introduced by this year.

While there is a concern on revenue gap following the move, some economists have turned positive on Malaysia's consumer sentiment as the move is likely to boost the country's domestic consumption.

"The removal of GST will boost consumer and business sentiment which will lead to higher private consumption, lower cost of doing business in some cases and induce businesses to invest more," said DBS Group Research in a report dated May 17.

Economists also generally believe that Malaysia is facing a short-term pain, which may lead to a long-term gain amid its economic reform.

"We need to lower public debt, debt servicing, and government consumption to improve growth given its inverse and significant relationship (between public debt as well as debt service against the GDP based on per capita)," said AmBank Research in its report Friday.

According to the report, the focus areas for Malaysia's new government going forward could be improving the monitoring of the expenditure in each area of the economic activities, especially at the micro level.

Greater transparency on government-guarantee loans under the public-private partnerships that may not be fiscally responsible, improving and effectively managing government consumption could also be the key areas.

The government may also be targeting high-impact and productive businesses to drive growth, boosting investors' and household confidence by addressing leakages and attractive ringgit to support overall business competitiveness.

"We expect the noises on the Malaysian front will potentially taper off, compensated with greater levels of transparency, governance and clarity on the direction of the economy," said Ambank Research.

The Malaysian economy grew 5.4 percent year-on-year in the first quarter, supported by continued expansion in private sector activity and strong support from net exports. The country's current account surplus stood at 15 billion ringgit (3.77 billion U.S. dollars) or 4.4 percent of GDP as of the first quarter.

As of May 15, its central bank's international reserves amounted to 109.4 billion U.S. dollars, which is sufficient to finance 7.6 months of retained imports and is 1.1 times the short-term external debt. 
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