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NEWS UPDATES Asean Affairs    30 July 2012

Rating agency affirms stable outlook for Malaysia


Standard & Poor's Ratings Services (S&P) has affirmed Malaysia’s “A-/A-2” foreign currency and “A/A-1” local currency sovereign credit ratings with the outlook on the long-term rating remaining stable.

The rating agency has at the same time affirmed the country’s Asean scale rating at “axAAA/axA-1+”.

“The sovereign credit rating on Malaysia reflects the country’s strong external liquidity position, its open and competitive middle-income economy, and high savings rate,” it said in a statement.

It noted that the country’s foreign reserves rose to US$133.6 billion at the end of December 2011 (versus $106.5 billion the year before), sufficient to finance 5.1 months of current account payments.

S&P credit analyst Takahira Ogawa said Malaysia had a deep bond market when compared with most of its peers, which reduces its reliance on external financing.

“Generally pragmatic economic policies and the Government’s efforts to enhance transparency and corporate governance have improved Malaysia’s business environment.”

However, Ogawa said the country’s moderately weak fiscal and government debt profile for the rating category constrained the sovereign rating.
He expects the growth in general government debt in 2012 to be unchanged from 2011’s at 5.6 per cent.

“In our view, the slow fiscal consolidation stems from the high subsidies and the relatively weak revenue structure; Malaysia depends largely on petroleum-related revenues,” Ogawa said.

He said any planned reform of the subsidy system and the introduction of a goods and services tax (GST) would be after the general election, given the political sensitivities.

Ogawa said the Government’s fiscal position had been adversely affected partially by large public investments to boost growth, sometimes exceeding that of the private sector’s.

“However, this pattern might be changing. For example, foreign direct investments seem to have bottomed out. Besides, the recent rebound of private sector investments was partially due to the government’s initiatives for the Economic Transformation Programme.

“If the trend continues, the Malaysian economy could regain its vitality,” he said.

Ogawa pointed out that the stable outlook balanced Malaysia’s weak fiscal position with its external and monetary strengths.

“We may raise the sovereign credit ratings if stronger growth and the Government’s effort to reduce spending result in lower-than-expected deficits, as indicated in the 10th Malaysia Plan. With lower deficits, a significant reduction in government debt is possible,” he said.

But Ogawa said the country’s rating might be lowered if the Government could not deliver the reform measures to reduce its fiscal deficits and increase the growth prospects.

“These reforms may include, but are not limited to, the GST and subsidy reforms on the fiscal side, and private investment and economic diversification reforms on the economic growth agenda,” he said.

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