Wednesday, May 15, 2019
MARC has affirmed Malaysia’s sovereign rating of AAA with a stable
outlook based on its national scale. The AAA rating reflects the resilience of the Malaysian economy, its effective
monetary policy, as well as healthy external position. Its rating strengths
are, however, tempered by persistent fiscal deficits, high government debt and
rising contingent liability, as well as high household debt. The stable outlook is based on
the expectation that the new administration will continue implementing the
governance and institutional reforms it promised in the run-up to the May 2018 election. We
are, nevertheless, cautious about the risks posed by rising
geopolitical and geo-economic uncertainties.
Malaysia’s resilient economy, underpinned by a diversified
economic structure, significant natural resources and human capital endowments,
is an important rating support. Macroeconomic fundamentals remain sound, thanks
to continued proactive and practical economic management. Malaysia
is also globally competitive. In the World Economic Forum’s Global
Competitiveness Report 2018, for example, it was the only non-high-income
economy to make it into the top 25.
Another rating support is Malaysia’s effective monetary policy, as
evidenced by strong monetary policy transmission to bank lending
rates due to favourable shocks to the monetary base. Given that domestic
economic and financial considerations are guiding policy decisions, the monetary policy framework
has continued to deliver broad output and price stability. Over the
2011-2018 period, for example, growth and inflation volatility came in lower than
the median of its rating peers in MARC’s sovereign rating universe.
Malaysia’s external position remains healthy given persistent
current account surpluses, a manageable level of external debt and adequate
international reserves. As of April 30, Bank Negara Malaysia’s international
reserves stood at USD103.4 billion, equivalent to 1.0x total
short-term external debt. These attributes, together with a credible monetary policy, flexible
exchange rates and a well-developed financial system, continue to help limit
vulnerability to external developments.
Malaysia’s fiscal and debt management performance remain rating
constraints. Under the new administration, the fiscal deficit for 2018 has been
reset upwards to 3.7% of gross domestic product (GDP) at 2010 constant prices, compared
with 2.8% in Budget 2018. As the government’s Medium Term Fiscal Framework assumes a crude oil price range of USD60-USD70
per barrel over the 2019-2021 period, a slide to below USD60 per
barrel would be credit negative. Given this and elevated geopolitical
and geo-economic concerns, it has become a more challenging fiscal balancing
act.
The government’s debt risk profile remains fluid given the reliance on
off-budget
initiatives that include guarantees and public-private partnerships (PPP). As
of end-2018, total federal government direct debt stood at 51.8% of GDP,
slightly up from the previous year. Government-guaranteed debt also rose,
rising to 18.6% of GDP by the end of 2018. It is
important to note that the deferment and cancellation of several large-scale
transportation projects have significantly reduced the government’s outstanding
PPP commitments.
Another rating constraint is Malaysia’s high household debt. Despite its moderation to 83.0%
of GDP in 2018, risks remain because it comprises a significant 57.3% of banking system loans.
While aggregate household financial assets and liquid financial assets may be
2.1x and 1.4x of debt, not
all households can pay down debt if an economic disruption adversely affects
the labour market. In any case, the growth pace of financial
assets could fall below that of debt given a more difficult
economic environment.
Contacts:
Quah Boon Huat, +603-2717 2931/ boonhuat@marc.com.my;
Nor Zahidi
Alias, +603-2717 2936/ zahidi@marc.com.my