Fitch unexpectedly raised Malaysia’s outlook to “stable”, from “negative” previously.
In July 2013, Fitch Ratings attached a “negative” outlook to Malaysia on its ratings. Earlier this year, Fitch forecasted that there was a 50% chance of a downgrade in the rating.
Fitch maintained Malaysia’s long-term foreign currency issuer default rating (IDR) at A- and local currency at A, as it expects the country’s fiscal deficit to narrow further in 2015 despite lower oil prices, sending the ringgit and local stocks higher.
This change in rating, lifted Malaysia’s benchmark stock index by 0.7% and the Ringgit by 1%.
This “stable” rating was largely contributed by improvement in Malaysia’s fiscal finances, progress on the Goods and Services Tax (GST) and fuel subsidy reform. Also, the depth of Malaysia’s local capital markets supports the sovereign’s domestic financing needs.
Nevertheless, Fitch find Malaysia’s fiscal position remained weak. However, their forecast is that Malaysia’s current account will see a surplus of gross domestic product (GDP) – 1.4% in 2015 and 1.1% in 2016.
The narrowing current account is due to the decline in the savings rate and a pick-up in investments that is partly driven by the Economic Transformation Programme.
Concerns over 1MDB lingers as federal government debt and explicit guarantees continue to increase. Fitch believed the Malaysian sovereign was incurring additional contingent liabilities beyond explicit guarantees because of quasi-fiscal operations of 1MDB.
According to the statement, Fitch thinks there is a high probability that sovereign support for 1MDB would be forthcoming if needed.
The Ringgit will still see pressure in the near term with the narrowing current account. But market-wise, it will be positive now that it removes the uncertainty of potential move in credit rating for the next few months.
Standard & Poor’s (S&P) and Moody’s had assigned Malaysia ratings equivalent to Fitch’s A-. Fitch had been the only one opting for a “negative” outlook previously. S&P has a “stable” outlook on Malaysia, while Moody’s outlook is “positive”.
