All eyes on new govt's next moves

By NST Business - March 13, 2020 @ 10:13am

KUALA LUMPUR: Malaysia’s sovereign credit rating outlook hinges on its response to political volatility, the coronavirus pandemic and oil price shocks, Fitch Ratings said.

Fitch last affirmed Malaysia’s credit rating at “A-“ with a stable outlook in July 2019.

The challenges posed by Malaysia's recent political volatility and the global coronavirus pandemic were being exacerbated by a sharp drop in oil prices that would add to the strains on the nation's public finances,” Fitch said.

“How much these factors affect Malaysia's sovereign outlook will depend on their impact on the country's economic metrics and the policy approach that the new government adopts, in particular with respect to public finances and governance reforms,” it said in a report today.

The firm said the economic effects of the virus, however, could be short term, and some of Malaysia’s economic metrics pointed to strength.

Citing two examples, Fitch said the country continued to run current account surpluses and its foreign-exchange buffers were larger than those of many of its rating peers.

“These buffers are important given foreign investors' role in financing Malaysia's public debt.”

Oil prices have plunged in recent weeks, with the decline accelerating sharply after the collapse of Opec+ talks on March 6 led to a shift in Saudi Arabia's supply policy.

Fitch said Malaysia is a net oil exporter, and the price developments would have an adverse effect on its oil revenue.

Malaysia’s 2020 Budget had assumed an average oil price of US$62 per barrel.

Fitch estimated that government revenue could be about 0.4 per cent of gross domestic product (GDP) lower than the budget assumed, should oil prices stabilise at around US$40 a barrel this year.

The firm said the medium-term fiscal outlook was an important rating driver for Malaysia as public debt, at 62 per cent of GDP, was high relative to the median of its “A” rated peers (50 per cent).

“The previous Pakatan Harapan (PH) coalition government had sought to consolidate the public finances over the medium term, but had shown a willingness to tolerate wider deficits in the near term, to counter the domestic growth impact of the coronavirus.”

The firm said the new administration under Prime Minister Tan Sri Muhyiddin Yassin had yet to publicise its fiscal plans, including whether public spending in 2020 might go beyond the coronavirus-driven stimulus package that was recently announced by his predecessor Tun Dr Mahathir Mohamad.

“Another important factor to watch is the new government's approach to governance reforms. The previous administration made progress on this front, as evidenced by an improvement in Malaysia's World Bank governance scores for 2019.

“Whether such progress will be sustained remains to be seen, and will be a factor in our credit assessments.”

The government's approach to the trials of former officials launched under the PH coalition might provide an indication of its broader stance on governance, Fitch added.

It said the transition to the new government occurred relatively quickly and smoothly, and some policies - such as a focus on infrastructure development - are likely to remain intact.

Nevertheless, the political volatility surrounding the transition illustrates heightened policy uncertainty and may dampen investor sentiment, constraining economic growth.

“This effect will be particularly marked in the next few weeks, as the new administration's support in the legislature will remain unclear until parliament reconvenes in May, but may also endure over the medium term,” it added.