Recently, Fitch unexpectedly upgraded Malaysia’s rating outlook from “negative” to “stable” was seen as a positive sign for the country.
The reason for the upgrade? The new consumption tax, Goods and Services Tax (GST) and the fuel subsidy reforms. These are seen as supportive of Malaysia’s finances even as federal government debt and explicit guarantees continue to increase.
Fitch is one of the three nationally recognised statistical rating organisations (NRSRO) designated by the U.S. Securities and Exchange Commission in 1975.
They mainly publishes research, independent ratings and credit analysis of securities issued around the world. The rating of the creditworthiness of a security is displayed in a simple, and easy to use grading system (“AAA” to “D”).
| Rating | Credit Quality | Expectation Of Default Risk | Capacity For Payment Of Financial Commitments | Example |
|---|---|---|---|---|
| AAA | Highest | Lowest | Exceptionally strong | Australia |
| AA | Very high | Very low | Very strong | Belgium |
| A | High | Low | Strong though this capacity may be more vulnerable to adverse business or economic conditions | China |
| BBB | Good | Low | Adequate but adverse business or economic conditions are more likely to impair this capacity | Colombia |
| BB | Speculative | Vulnerable in the event of adverse changes in business or economic conditions | Business or financial flexibility supports the servicing of financial commitments | Hungary |
| B | Highly speculative | Material default risk present, but a limited margin of safety remains | Financial commitments are currently being met, however capacity for continued payment is vulnerable to deterioration in the business and economic environment | Jamaica |
| CCC | Substantial credit risk | Default is a real possibility | - | Greece |
| CC | Very high levels of credit risk | Default of some kind appears probable | - | Ukraine |
| C | Exceptionally high levels of credit risk | Default is imminent or inevitable | Entered into a grace period, negotiation or agreement following non-payment of a material financial obligation | - |
| RD | Restricted default | - | Experienced a payment default on a bond, loan or other material financial obligation but has not entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, and has not ceased operations | - |
| D | Default | - | Entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, or has ceased business | - |
A credit rating outlook indicates the potential direction of a rating over the intermediate term, typically two years. The outlook provides information to investors on the potential evolution of a rating, hence it increases the precision of the rating.
| Rating Outlook | Meaning |
|---|---|
| Stable | Rating is not likely to change |
| Positive | Rating may be raised |
| Negative | Rating may be lowered |
| Evolving | Rating may be raised or lowered |
Rating agencies gather and analyse a variety of financial, industry, market and economic information, synthesise that information and then publish independent, credible assessments of the creditworthiness of securities and issuers. This provides a convenient way for investors to judge the credit quality of various alternative investment options. Rating agencies also publish considerable independent research on credit markets, industry trends and economic issues of general interest to the investing public.
Fitch revised Malaysia’s sovereign credit rating outlook from stable to negative in 2013 as the possibility of addressing public finance weaknesses deteriorated after the 2013’s General Election. The news came as Ringgit slid to a three-year low against the US dollar and 15-year low against the Singapore dollar, making imports more expensive. Fitch believed the lack of progress on structural budgetary reform could be due to the general elections, resulting in the government delaying its reform – leaving Malaysia’s public finances more exposed to any future negative shock. Fitch also said Malaysia’s credit fundamentals were equally weak.
So, how does this benefit Malaysians, like you and me?
1. Increased Government revenue leads to better development
The announcement by Fitch which accorded stable prospects to Malaysia compared to the previous negative one is a proof that the country’s rising revenues are able to better cover debt obligations.
When ratings are good, it means that the economy is more stable while national output and income are looking to increase. Investors and businesses dealing with Malaysia increased their confidence in the country. The ratings also shows that the country’s administration is strong. If the administration did not have the confidence of a ratings organisation like Fitch, then the Government’s capabilities would be affected.
With increased revenue, it will be easier for the Government to implement infrastructure projects faster throughout the country, and be on track to realise the status of a high-income nation by 2020. The projects will also help with employment rate and investments in the private sectors.
2. Draw investors to invest in Malaysia
The upgraded rating would also help restore investor confidence, further enhancing Malaysia’s attractiveness as a preferred investment destination. Fitch’s report is one of the reports relied upon by investors when decided on their investment, along with Moody’s and Standard & Poor’s.
The latest Fitch rating is likely to give an added boost to the Government’s efforts in attracting high-quality and high-value-added investments that are crucial towards achieving the country’s aim of attaining the status of a high-income economy in the next five years.
3. Increased value for Ringgit and local stocks
The equity market’s primary fear was that a potential Fitch downgrade was likely to have an impact on the currency rates and value of local stocks. However, Fitch maintained Malaysia’s long-term foreign currency issuer default rating at A- and local currency at A. The change in rating, lifted Malaysia’s benchmark stock index by 0.7% and the Ringgit by 1%.
The spot Ringgit rose as much as 1.1% to 3.7330 per dollar, its strongest since June 23. Other Malaysian assets also rose. We saw the KLSE stocks jumped by 1.6% after the announcement.
Better Ringgit value will definitely help out four categories of people – travellers, parents supporting their kids that are studying overseas, and businessmen with foreign dealings. They will get better value of exchange rate for the money they are spending or investing.
Stronger Ringgit will also mean stronger purchasing power and lower inflation rate for the country. On consumers’ end, foreign products and travelling overseas become less expensive. This will also benefit traders.
On a national level, a stronger Ringgit will definitely have a positive impact on the paying off foreign debt obligations in US dollars.
Basically rating agencies like Fitch, assess how likely a borrower (i.e. a country) is to repay its debts. Losing your rating or being downgraded can have a fatal effect on your country’s ability to borrow money on the markets.
