Both Fitch Ratings and Moody’s Investors Service said in e-mailed replies that they had not downgraded Malaysia’s sovereign ratings to BBB (or Baa in the case of Moody’s) in response to queries from StarBiz over the text message.
A sovereign credit rating gives investors some insight into a country’s credit risk and usually involves political risk analysis. Basically, a higher rating allows Governments to raise debt in the capital markets with a lower risk premium.
Nevertheless, observers noted that the text message was symptomatic of market concerns over the country’s many challenges, including the Government’s fiscal position and issues over 1Malaysia Development Bhd’s (1MDB) RM42bil debt.
Together with weak commodity prices, poor first-quarter earnings and a more uncertain outlook for economic growth, these issues have affected market sentiment and that has also impacted the ringgit, Asia’s worst-performing currency.
In January, the Government had revised the fiscal deficit target for this year to 3.2% of gross domestic product (GDP) from 3% after crude oil prices fell by more than half. The fiscal deficit to GDP stood at 3.5% last year.
Overall debt to GDP levels have also risen and hover near the 55% self-imposed limit, but could be as high as 70% if contingent liabilities of non-financial public enterprises were included.
Fortress Capital Asset Management (M) Sdn Bhd chief executive officer Thomas Yong, who was not aware of the text message, said investors were bound to be concerned, given that headlines “have not been fantastic”. Soft commodity prices and the foreign fund outflow have not been positive for the country either.
Yong said while foreign reserves had been steady in the past couple of years, indicating a net inflow, this could quickly change unlike foreign direct investment.
Fitch’s Asia-Pacific sovereign ratings head Andrew Colquhoun would make no further comment on the ratings. “We have said we expect to review the ratings again before the end of this month,” he said in an e-mail reply.
Finance Ministry officials were reported to have met with the rating agency’s analysts a week ago to convince them that Malaysia’s economy “is still sustainable and should be viewed positively”.
Colquhoun had said in March that Malaysia’s sovereign rating sat more naturally in the BBB-rated category based on the structural credit fundamentals. The March statement from Fitch also said that there was more than a 50% chance of a downgrade.
Fitch on Jan 20 had indicated that it was “more likely than not to downgrade the rating of the sovereign” in the coming months, following the Government’s revision of this year’s fiscal deficit target as well as the reduction of the GDP growth forecast to between 4.5% and 5.5% from 5% to 6%.
Moody’s senior analyst Christian de Guzman confirmed that the rating agency’s stance on Malaysia remained the same with no downgrade. “We will review the sovereign rating as and when developments warrant such a re-assessment,” he added.
De Guzman had expressed concern recently at a media briefing that the country’s fiscal consolidation may be derailed should the Government be forced to financially assist 1MDB.
He had said the concern was over how far the Government would go to honour 1MDB’s debts, as this would affect the ongoing fiscal consolidation. The magnitude of support was also important, as this could also affect the fiscal consolidation trend.