News Room - Business/Economics

Fitch Ratings-Hong Kong-30 June 2015: Fitch Ratings has affirmed Malaysia's Long-Term foreign currency Issuer Default Rating (IDR) at 'A-' and local currency IDR at 'A'. The issue ratings on Malaysia's senior unsecured local currency bonds are also affirmed at 'A'. The Outlook on the Long-Term IDRs has been revised to Stable from Negative. The Country Ceiling is affirmed at 'A' and the Short-Term Foreign Currency IDR is also affirmed at 'F2'.

KEY RATING DRIVERS
The affirmation of Malaysia's IDRs and the revision of the Outlook to Stable reflects the following key rating drivers:

- Fiscal finances improving. Malaysia's fiscal finances have improved since last year with the general government deficit falling from 4.6% of GDP in 2013 to 3.8% of GDP in 2014 and general government debt/GDP declining from 54.7% at the end of 2013 to 53.9% at the end of 2014, as per Fitch estimates. Fitch views progress on the Goods and Services Tax (GST) and fuel subsidy reform as supportive of the fiscal finances. A further narrowing of the deficit is forecast in 2015 despite lower oil prices. Nevertheless, as against the 'A' median, Malaysia's fiscal position continues to remain weak. General government debt as a share of GDP at the end of 2014 was 53.9%, which is still above the 'A' median of 47.2%.

- Weaker external liquidity but still above 'A' median. Malaysia's external liquidity position has weakened, with reserve coverage of short-term external debt falling to 1.1 times by the end of 2014, as against 1.3 times at the end of 2013. As per Fitch's broader external liquidity metric as well, Malaysia's liquidity ratio had weakened to 113.2% by the end of 2014, from 130.0% at the end of 2013. However, despite the deterioration, Malaysia's external liquidity ratio was above the 'A' median of 104.6% and it is expected to improve over the forecast period. The country remained a net external creditor at the end of 2014 as per Fitch estimates.

- Declining current account surplus. The current account surplus continues to decline and from an average of 15.6% of GDP from 2005-09, had fallen to 7.2% b/w 2010-14 (Fitch estimates). Fitch believes this fall is being driven by a decline in the savings rate and a pick up in investments that is partly driven by the Economic Transformation Programme. Nevertheless, the current account surplus of about 4% in 2014, was above the 'A' median of 1.7%. Current account surplus forecast for 2015 is 1.4% and 1.1% in 2016.

- Fiscal financing flexibility. The depth of Malaysia's local capital markets supports the sovereign's domestic financing needs. While the share of non-resident holdings of government securities is high and a weakness in the sovereign's debt profile, local agencies such as Employee Provident Fund (EPF) can provide funding to support to the sovereign in the event of a sell-off by non-residents.

- Rising contingent liabilities. Federal government debt and explicit guarantees continue to increase. Total federal government explicit guarantees at the end of 2014 rose to 16% of GDP from 15.4% a year earlier. Fitch continues to believe that the Malaysian sovereign is incurring additional contingent liabilities beyond explicit guarantees because of quasi-fiscal operations of state-owned entity 1MDB. Fitch thinks there is a high probability that sovereign support for 1MDB would be forthcoming if needed.

- Malaysia's average income level (at market exchange rates), broader level of development, and World Bank governance indicators are weaker than 'A' category medians and closer to 'BBB' category norms. These structural features weigh on the credit profile.

- Favorable GDP growth rates. Malaysia's rating remains supported by reasonably strong real GDP growth rates and low inflation volatility. Malaysia's five-year real GDP growth averaged 5.8% over 2010-14, as against 3.1% for the 'A' median, whereas inflation volatility was 1.3% as against 1.7% for the 'A' median.

RATING SENSITIVITIES
The Stable Outlooks reflect Fitch's assessment that upside and downside risks to the ratings are currently broadly balanced.

The main factors that could, individually or collectively, lead to a negative rating action are:
- Fiscal slippage relative to the government's targets and lack of progress on structural budgetary reform.
- Problems for the banking sector potentially derived from a shock to interest rates or employment sufficient to impair the sovereign's debt service capacity.
- Deterioration in the balance of payments or investor sentiment that impairs the sovereign's external balance sheet.

The main factors that could, individually or collectively, lead to a positive rating action are:
- Greater confidence on the resilience and pace of deficit reduction and the government's commitment to contain public indebtedness.
- Sustained growth without the build-up of macro imbalances.
- Narrowing of structural weaknesses relative to peers including development indicators and governance.

KEY ASSUMPTIONS
- Global economic assumptions are consistent with Fitch's Global Economic Outlook
- No escalation of regional or geopolitical disputes to a level that disrupts trade and financial flows