Fitch Affirms Malaysia’s “BBB+” Sovereign Rating With Stable Outlook

·3-min read

Fitch Ratings has affirmed Malaysia’s long-term foreign currency issuer default rating (IDR) at “BBB+” with a stable outlook.

The international credit rating agency said Malaysia’s economy is recovering gradually from last year’s 5.6% contraction caused by the COVID-19 pandemic, reported Bernama.

“We expect gross domestic product (GDP) growth of 4.5% in 2021 and 6.3% in 2022, as the output gap narrows and the vaccine rollout gathers pace, which should allow the services sector to benefit from pent-up demand,” it said.

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Fitch noted that the social distancing measures rolled out by the government were accompanied by material relief measures, such as wage subsidies, social security payments, allocation for procurements of vaccines, grants to small and medium enterprises (SMEs), corporate loan guarantees as well as a repayment moratorium on certain bank loans.

“As a result of this relief spending and reduced government revenue, we expect the fiscal deficit to rise to 6.5% of GDP in 2021 from 6.2% in 2020,” it said as quoted by Bernama.

With the significant increase in Malaysia’s general government debt due to the pandemic, Fitch expects the country’s debt to hit 78.1% of GDP this year, compared to 65.2% in 2019.

It explained that the debt figures it used “include officially reported ‘committed government guarantees’ on loans, which are serviced by the government budget, and 1Malaysia Development Bhd’s net debt, equivalent in December 2020 to 12.7% and 1.4% of GDP respectively”.

Malaysia’s debt burden is much higher compared to the 57% median for sovereigns within the ‘BBB’ rating category.

“Malaysia’s gross debt is over 400% of revenue, around three times the peer median,” it pointed.

Nonetheless, Fitch expects Malaysia’s debt ratio to slightly decline to 77% of GDP next year.

It said Malaysia’s medium-term fiscal outlook is subject to heightened political volatility.

“We expect a gradual reduction in the fiscal deficit, which is forecast to average 5.2% of GDP over 2021 through 2023 (above the government’s average target of 4.5%) as growth lifts revenues and Covid-19-related spending measures lapse,” said Fitch.

The ratings agency expects the country’s general government revenue to remain low hovering at 18.2% of this year’s GDP (‘BBB’ median: 26.6%).

Malaysia is dependent on crude oil production, which the government forecast will generate 16% of this year’s total revenue, down from 25% last year, when Petroliam Nasional Bhd (Petronas) rolled out a special dividend.

Fitch said the low revenue base is aggravated by the removal in 2018 of the goods and services tax (GST) – which was replaced by the sales and services tax (SST). This has also led the government, in recent years, to draw on government-linked companies’ special dividends.

“Lingering political uncertainty weighs not only on the policy outlook, but also on investment and prospects for an improvement in governance standards, in Fitch’s view,” it said.

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