Fitch sees Malaysia in negative sovereign debt risk

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Despite steadfast efforts by Malaysia to fix its pressing fiscal deficit, international rating agency Fitch Ratings maintained its “negative outlook” for the country. Fitch Ratings is maintaining its Negative Outlook on Malaysia’s sovereign ratings. In its 2015 Outlook for Emerging Asian Sovereigns report on Monday, said it said eight of 10 Emerging Asian sovereigns were on Stable Outlook, with two (Malaysia and Mongolia) on Negative Outlook. The ratings agency pointed out its negative outlook for Malaysia, whose A- rating it had affirmed on July 23, “reflects the erosion of its current account surplus amid large public sector deficits and a drop in oil prices”. Fitch said this was in the context of relatively weak credit fundamentals for an ‘A’ range sovereign.

Malaysia’s commitment to lowering the government’s deficit and introduction of GST are potentially constructive steps, but a track record of budget management remains key to limiting further credit pressure on the sovereign rating. “Market volatility in December 2014 could be a foretaste of what is to come in 2015 as the US Federal Reserve moves towards raising interest rates while other major central banks may ease policy further,” it said. There is a news regarding Malaysia's export sector which is expected to bounce back positively from the second half of this year despite the ringgit's depreciation. However Fitch acknowledges that the government has so far stuck to a path of consolidation for the headline federal deficit set out in July 2013, although the drop in oil prices could delay or derail fiscal consolidation, if sustained

Malaysia's five-year credit default swaps, which investors use to hedge against risks of debt default, have jumped some 40 basis points (bps) in the first two weeks of 2015 to 142/148 bps. That compares with the performance of Malaysia's nearest peer Thailand, whose CDS have risen 10 bps, and Indonesian CDS, which have gained 14 bps. While global rating agency S&P says 1MDB's failure to meet a loan obligation has little impact on the company's bonds, investors are worried about the wider implications for the country's sovereign rating. About 45% of Malaysian sovereign debt is owned by foreigners.

The government derives about 31 percent of its income from oil-related sources, official data show. Malaysia’s sovereign rating could move to stable if oil prices recover to the US$100 (RM355) per barrel level and if policymakers continue with the fiscal consolidation exercise. Standard Chartered regional head of research, Southeast Asia, Edward Lee Wee Kok, said this would include the implementation of Goods and Services Tax (GST) and fuel subsidy elimination. "The recovery in oil prices will take away fears of growth slowing down," he said at the Standard Chartered's Global Research Briefing 2015 here today. Lee said the sliding oil prices, which has dropped from the high of US$100 per barrel last year to below US$50 per barrel now, had affected business sentiment. "The recovery in oil prices will put Malaysia on a stronger fiscal position," he said.

However, if oil prices remain at the current record low level, he said Malaysia’s fiscal position could potentially be at a shortfall of 0.5 per cent of gross domestic product. Nomura Holdings Inc. lowered its forecast for Malaysia’s 2015 economic growth to 4.7 percent from 5 percent as the nation is “unambiguously the big loser” in Asia due to the decline in oil prices, analysts including Euben Paracuelles wrote in a research note yesterday. Fitch said it was striking that the Emerging Asian markets should have been caught up in turbulence coming from Russia, as the region's direct links with Russia are few. “These events show that Emerging Asia remains vulnerable to contagion from events elsewhere,” it said.