Moody's affirms Malaysia's A3 rating; stable outlook

Moody's affirms Malaysia's A3 rating; stable outlook
Moody's expect that the government's demonstrated commitment to fiscal consolidation will only result in limited improvement on Malaysia's public indebtedness and debt affordability - file pic
SINGAPORE: Moody's Investors Service has affirmed the Government of Malaysia's local and foreign currency issuer and senior unsecured bond ratings at A3.

The outlook is maintained at stable.

Moody's underlined that the key drivers underpinning the A3 rating and stable outlook are:
  1. Moody's expectation that the government's debt burden will remain high but broadly stable
  2. The relatively high exposure of the economy and financial system to a tightening in external financing, as reflected in low reserve coverage of external payments, although balanced by several mitigating features
  3. Malaysia's healthy and resilient growth prospects
Moody's has also affirmed the A3 senior unsecured ratings to the US dollar trust certificates issued by Malaysia Sovereign Sukuk Berhad and Malaysia Sukuk Global Berhad, special purpose vehicles (SPV) established by the Government of Malaysia.

These trust certificates are considered direct obligations of the Malaysian government and their ratings automatically reflect changes to Malaysia's sovereign rating.

Moody's has also affirmed the instrument ratings on senior unsecured debt issued by Khazanah Nasional Berhad at A3. The Malaysian government guarantees these instruments.

Malaysia's long-term foreign currency (FC) bond ceiling is unchanged at A1 and its long-term FC deposit ceiling is A3. Malaysia's short-term FC bond and deposit ceilings are also unchanged at P-1 and P-2 respectively.
These ceilings act as a cap on ratings that can be assigned to the FC obligations of entities other than the government that are domiciled in the country. The long-term local currency (LC) bond and deposit country ceilings are unchanged at A1.

RATINGS RATIONALE

FIRST DRIVER -- Government debt burden will remain high but broadly stable

At 50.9% of GDP as of June 2017, Malaysia's general government debt is significantly higher than the A-rated peer median (40.5% of GDP at end-2016). While Moody's expect the debt ratio to remain stable in the next few years, it is also likely to stay above the median for A-rated sovereigns.

The government's commitment to fiscal consolidation has resulted in fiscal deficits narrowing in each of the past seven consecutive years. While the pace of consolidation will slow going forward, Moody's still expect
the deficit to narrow slightly further to 2.8% of GDP in 2018 in line with the budget projections, from 3.0% in 2017 and 6.7% in 2010. 

SECOND DRIVER - High exposure of the economy and financial system to a tightening in the availability and cost of external financing

The active nonresident investor presence in Malaysia's financial markets leaves it vulnerable to sudden swings in capital flows. Foreign currency reserves have climbed steadily from a recent trough, but remain lower than economy-wide cross-border debt due over the next year.

Foreign reserves are larger than short-term debt by original maturity. However, once currently maturing medium- and long-term debt is added, the ratio of annual external liabilities due to reserves -- as measured by Moody's external vulnerability indicator (EVI) -- has been significantly above the 100% threshold for many years.

Moody's says their forecast it at 139.7% for 2018 and do not expect it to change significantly in the next few years.

There are several mitigating features against these external vulnerabilities. A sizeable surplus on the net international investment position acts as a cushion. A large domestic institutional investor base also provides supportive demand, at least for local currency debt, should foreign investors' appetite for Malaysian assets diminish. 

THIRD DRIVER -- Healthy and resilient growth prospects

Malaysia has a highly diversified and competitive economic structure. Between 2012-21, Moody's expect GDP growth to average 5.1%, making Malaysia one of the fastest growing A-rated sovereigns, surpassed only by China, Ireland, and on par with Malta.

Growth's resilience through external headwinds, such as the fall in commodity prices and oil prices and a tumultuous political climate, is a testament to the economy's shock absorption capacity.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook balances long-standing credit constraints -- a high debt burden and vulnerability to external risks -- against inherent credit strengths, including resilient economic growth and the presence of sizeable domestic institutions providing stable financing conditions for the government's debt.

In the absence of further reform, Moody's expect that the government's demonstrated commitment to fiscal consolidation will only result in limited improvement on Malaysia's public indebtedness and debt
affordability. 

MALAYSIA'S KEY ECONOMIC FACTORS PRESENTED BY MOODY'S
  • GDP per capita (PPP basis, US$): 27,292 (2016 Actual) (also known as Per Capita Income)
  • Real GDP growth (% change): 4.2% (2016 Actual) (also known as GDP Growth)
  • Inflation Rate (CPI, % change Dec/Dec): 1.8% (2016 Actual)
  • Gen. Gov. Financial Balance/GDP: -3.1% (2016 Actual) (also known as Fiscal Balance)
  • Current Account Balance/GDP: 2.4% (2016 Actual) (also known as External Balance)
  • External debt/GDP: 74.5% (2016 Actual)
  • Level of economic development: Very High level of economic resilience
  • Default history: No default events (on bonds or loans) have been recorded since 1983