PETALING JAYA, Jan 12: Moody’s Investors Service has cut Malaysia’s outlook from “positive” to “stable” on deterioration in growth and external credit metrics due to external pressures, as well as high macro-financial risks.
In a statement yesterday, Moody’s said its changed outlook is also based on limited improvement it expects in the country’s public debt burden and debt affordability, despite progress in fiscal consolidation.
Moody’s has maintained Malaysia’s senior unsecured bond ratings at A3.
It opined that fiscal consolidation efforts by the government have had and will continue to have limited impact on its balance sheet. “That partly reflects changes in the external environment which have reduced government revenues over the period. Those environmental changes have also undermined Malaysia’s external position, with large capital outflows, a falling current account surplus, sharp exchange rate depreciation and falling reserves.”
Moody’s added that alongside rising external exposure, material domestic imbalances continue to pose a risk to growth and the financial system, with household debt levels still high by the standards of Malaysia’s peers.
Moody’s said while lower trade has weighed on economic growth, it has also contributed to a weakened external payments position.
“The current account surplus has fallen to a projected 2.1% of gross domestic product (GDP) in 2015 from an average of 11.0% over the preceding ten years, providing a thinner buffer against volatile capital flows.
“In turn, foreign exchange reserves have declined by more than US$20 billion since the end of 2014, while the currency has depreciated by more than 20% against the US dollar,” it said.
Moody’s cautioned that the depreciation of the ringgit may pose some upside risk for inflation in the near term, while providing only limited support for exports due to weak external demand.
It said even though the government’s debt burden has stabilised below its self-imposed ceiling of 55% of GDP, it has not entered a sustained downward trend.
Rising contingent risks to the government’s balance sheet are represented by the continued increase in explicitly guaranteed debt, which rose to 15.1% of GDP as of the first half of 2015 from 11.8% in 2010.
Moody’s said increased risk posed by the high stock of private sector debt in an environment of slowing growth has also contributed to the revision in Malaysia’s outlook.
“Although the aggregate balance sheets of the household and corporate sectors continue to have adequate asset buffers, slower economic growth and cooling asset prices—particularly, in real estate and equity markets—could stress borrowers’ ability to repay debt.
“In turn, this could feed back to even more limited support to economic growth from consumption and residential investment. Nevertheless, we expect the banking system to remain largely resilient to a potential deterioration in asset quality,” it added.
Moving forward, Moody’s expects Malaysia to continue to grow faster than other A-rated countries this year and over the medium term as many of its fundamentals are largely intact.
“Malaysia’s sovereign rating also continues to be supported by the government’s favourable debt structure and the depth of onshore capital markets, both of which mitigate the impact of capital account and exchange rate volatility,” it said.
— THE SUN