KUALA LUMPUR: Fitch Ratings has affirmed Malaysia's long-term foreign currency issuer default rating at “A-“ with a stable outlook.
The firm said Malaysia’s ratings balanced strong and broad-based medium-term growth with a diversified export base, against high public debt and some lagging structural factors.
The latter factors included weak governance indicators relative to peers, Fitch said in a statement today.
However, Fitch said this may gradually improve with ongoing government efforts to enhance transparency and address high-profile corruption cases.
The firm expect Malaysia’s economic growth to slightly ease in the rest of this year as a result of a worsening external environment, but still to hold up well at 4.4 per cent in 2019 and 4.5 per cent next year.
“Malaysia is a small open economy that is integrated into Asian supply chains, but it also has a well-diversified export base, which helps cushion the impact from a potential fall in demand in specific sectors.
“Global trade tensions are likely to have a detrimental effect on Malaysia's economy, as with many other countries, but this may be partially offset by near-term mitigating factors, such as trade diversion, in particular towards the electronics sector,” it added.
Domestic private consumption is likely to hold up well and public investment should pick up again in the next few years after the successful renegotiation of some big infrastructure projects, most prominently the East Coast Rail Link.
Fitch, however, said the outlook for private investment was more uncertain.
“FDI inflows were strong in the past few quarters, but investors will continue to face both external trade and domestic political uncertainty. The Pakatan Harapan coalition took office in May 2018 with very high expectations.
“It has set a number of policy initiatives in motion, but holds only a small majority in parliament and has seen its previously high public approval rates fall significantly,” it said.
Fitch expects Malaysia to meet its fiscal deficit target for 2019 of 3.4 per cent of gross domestic product (GDP).
“Political pressures and growth headwinds could motivate the government to increase its current spending, but we believe that if it does so, it would seek additional revenues or asset sales to contain the associated rises in the deficit and public debt.”
Fitch estimates general government debt to gradually decrease from 62.5 per cent of GDP in 2019 to 59.3 per cent in 2021.
The debt figures used by Fitch include officially reported "committed government guarantees" on loans, which are serviced by the government budget, and 1Malaysia Development Bhd's net debt, equivalent at end-2018 to 9.2 per cent and 2.2 per cent of GDP respectively.
The firm said progress in implementing reforms that institutionalise improved governance standards through stronger checks and balances, and greater transparency and accountability would strengthen Malaysia's business environment and credit profile.
The country’s monetary policy is likely to remain supportive of economic activity, after Bank Negara Malaysia's reduced its policy rate by 25 basis points to 3.0 per cent last May, which Fitch said, seemed a pre-emptive response to increased external downside risk.
Fitch expects another 25bp rate cut in 2020 on the back of continued external and domestic uncertainty.
“Banking sector fundamentals remain broadly stable. Elevated, but slightly declining household debt at 83 per cent of GDP and property-sector weakness should be manageable for the sector, but present a downside risk in case of a major economic shock,” it said.