Malaysia - 2014

MARC has assigned a national scale sovereign rating of ‘AAA’ to Malaysia with a stable outlook. The Malaysian national scale sovereign rating is essentially a local currency rating and does not capture foreign currency transfer and convertibility (T&C) risks. As the ‘AAA’ rating is the highest grade rating that can be assigned to any local or foreign domiciled ringgit Malaysia debt issuer on MARC’s rating scale, the national scale sovereign rating represents the country ceiling for any local currency obligations issued and rated in Malaysia. The rating is based solely on an analysis of information in the public domain. Malaysia has no local currency debt rated by MARC.

Supporting the rating is Malaysia’s favourable economic conditions underpinned by sound macro policies which have enabled the country to sustain resilient real economic growth of approximately 5% to 6% per annum (p.a.) in the past few years with the exception of the recessionary year of 2009 and 2013. The strong gross domestic product (GDP) growth performance since the recovery from the 2009 recession was primarily driven by domestic factors that offset the much weaker external sector resulting from sluggish global trade following lacklustre performance of the advanced economies as well as the moderation of several emerging economies such as China and India. 

MARC believes that effective monetary management has also contributed to Malaysia’s commendable track record of stable inflation and economic resilience. MARC observes that Bank Negara Malaysia’s (BNM) monetary stance has remained sufficiently accommodative to support growth but expects a cautious tightening of monetary policy to be pursued to counter subsidy rationalisation-associated inflationary pressures in the near term. Furthermore, Malaysia’s medium- and long-term growth prospects should benefit from the implementation of the government’s Economic Transformation Programme (ETP) which has bolstered private investment since its inception in 2010. MARC opines that Malaysia’s improving global competitiveness will positively affect the country’s private sector investment and economic growth.

Also supporting the rating is a strong and well supervised banking system with measures and policies in place to limit near-term systemic risk. The banking system remains sturdy with asset quality continuing to improve as observed in the gradual easing of the gross impaired loans ratio. Even under the stringent Basel III guidelines, the banking system’s common equity Tier 1 (CET1), Tier 1 and total capital ratios were well above the minimum requirements.

The favourable government external debt profile also moderates risk to the economy. Of the total external debt in 2013, only 5.3% or RM16.8 billion was federal government debt. As a ratio of total government debt in 2013, federal government external debt accounted for a mere 3.1%.

Moderating these positives is the country’s persistent budget deficit that has led to a rapid increase in government debt in recent years, mainly due to increasing operating expenditure which outpaced revenue growth in the past 10 years. Mitigating this, however, is the general declining trend in budget deficit as a ratio of GDP which the government aims to reduce to 3% by 2015. Malaysia’s dependence on petroleum-related revenue, which accounted for roughly 29% of total revenue in 2013, is another area of concern as petroleum reserves are expected to decline over the coming years.

MARC is also of the view that, while Malaysia’s external debt remains manageable, its increasing pace of growth of 8.1% p.a. on a compound annual growth rate (CAGR) basis since the recession in 2009 (2003-2007: 0.1% p.a.) bears monitoring, especially when the external debt service ratio has been in the double digits since 2011 (2013: 10.3%). The ratio of total short-term external debt has also risen to 40.3% of total external debt in 2013. However, MARC opines that the situation is mitigated by the strong level of international reserves, equivalent to 9.5 months of retained imports and 3.4 times of short-term external debt.

MARC also notes the trend in the current account (CA) surplus is deteriorating due to relatively benign export performance and rising imports in line with the expansion of domestic investment and consumption activities. Notwithstanding this, MARC opines that efforts by the government to maintain the CA balance in positive territory is achievable if projects with high import content are delayed as currently planned. In addition, the declining CA surplus against the backdrop of rising investment should be positive for future productive capacity. Malaysia’s risk profile is also augmented by massive inflows of portfolio capital in the past few years, which have elevated the risk of sudden capital outflows. The flexible exchange rate, deeper financial markets and strong financial sector, however, mitigate this risk, although sharp corrections in the ringgit may pose risk to business and consumer sentiment.

In the financial sector, household debt continued to rise to 86.8% of GDP in 2013. MARC views that rising household debt levels, juxtaposed against Malaysia’s relatively low per capita GDP and household income, remain a concern as this could lead to further deterioration in household balance sheets that may affect Malaysia’s future growth trajectory to some degree. Notwithstanding this, the household debt position is somewhat mitigated by the value of financial assets they own which as a ratio to debt remained stable at 2.2 times in 2013.

The stable outlook incorporates MARC’s expectations that the government will continue to maintain its momentum in pursing macro policies to strengthen its fiscal position and lessen financial imbalances.

Strengths

Challenges

• Persistent fiscal deficits and dependency on petroleum revenue;
• Rising government debt; 
• Deteriorating current account surplus; and
• High household debt and relatively low per capita GDP.