Fitch Ratings-Hong Kong-April 09:
Fitch Ratings has revised its Outlook on Malaysia's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable and has affirmed the rating at 'A-'.
Key Rating Drivers
The revision of the Outlook to Negative on Malaysia's Long-Term IDRs reflects the following key rating drivers:
The Malaysian economy is being heavily affected by the COVID-19 pandemic. A partial lockdown in place since mid-March has reduced domestic economic activity, and the pandemic has also undermined export earnings from commodities, manufacturing and intermediate goods, and tourism receipts. There is high uncertainty about the extent of the deterioration in economic growth and public finances, and the pace at which the pandemic will unwind. Recent political volatility may affect governance standards, which had been improving in the past two years.
Fitch forecasts a 1% contraction in economic activity in 2020 and a rebound to 5.8% growth in 2021, from 4.3% growth in 2019. These forecasts are subject to significant downside risks, depending on the length of the partial lockdown and evolution of the pandemic. The government announced a large stimulus package on 27 March, which should mitigate the decline in growth in 2020 by 2.8pp, according to the authorities' estimates. The package includes additional government spending on health, transfers to low-income individuals and relief measures for businesses, much of it temporary in nature. Non-fiscal measures include deferment of all bank loan and financing repayments for six months, and allowing withdrawals from the Employees Provident Fund.
Weaker growth, lower oil prices and stimulus spending have weakened the outlook for Malaysia's public finances. The government raised its 2020 fiscal deficit target to 4.0% of GDP, from 3.4%, itself an increase on the 3.2% target in the initial 2020 budget following an earlier stimulus package. The fiscal forecasts are subject to significant downside risk, in Fitch's view, in particular given the announcement earlier this week of additional relief measures to small and medium-sized enterprises. The government expects a tax revenue reduction of 1.0pp of GDP due to weaker economic activity and lower oil prices, but plans to draw on the buffers of government-linked companies (GLCs) through additional dividend payments. Lower capital spending and reduced expenditure on fuel subsidies will offset some of the additional spending.
General government debt is forecast to rise further above peer levels to 69.6% of GDP in 2020 from 65.3% in 2019, according to our calculations. The debt figures used by Fitch include officially reported "committed government guarantees" on loans, which are serviced by the government budget, and 1MDB's net debt, equivalent at end-2019 to 10.7% and 2.1% of GDP, respectively. The government guarantees another 7.5% of GDP in loans it does not service. Debt/revenue is in excess of 300% and well above that of peers. Part of the fiscal stimulus measures are temporary and will roll off next year, and the government has indicated it aims to resume fiscal consolidation in 2021, but it has not yet communicated a concrete strategy. This could, for instance, include measures to put the fiscal finances on a sounder footing, and make less use of temporary backstops to fill the gaps, such as dividends from GLCs and sales of their assets.
The new administration that took office on 1 March 2020 under Prime Minister Muhyiddin Yassin after a short period of political turmoil, is yet to announce its broader policy agenda. The change in power from the previous Prime Minister, Mahathir Mohamad, occurred peacefully, and some policies - such as a medium-term focus on infrastructure development - remain intact. In addition, the new government managed to swiftly create a stimulus package, in coordination with the central bank. Nevertheless, the unexpected transition illustrates heightened policy uncertainty and there is still some doubt about support for the current government in parliament, which reconvenes on 18 May for the first time since the transition.
An important rating driver is the 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 and whether corruption trials of former officials launched under the previous coalition will continue are uncertain. Deterioration in governance and political uncertainty may dampen investor sentiment, constraining economic growth.
Malaysia's 'A-' IDRs also reflect the following key rating drivers:-
Malaysia is relatively dependent on foreign financing, with foreign holdings of domestic government bonds around 23% of the total, down from a high of 34% in 2016. Moreover, external liquidity, as measured by the ratio of the country's liquid external assets to its liquid external liabilities, is weaker than that of 'A' rated peers. Short-term external debt is high relative to foreign-currency reserves (USD103.4 billion at end-February 2020), although a significant part of this is intra-group borrowing between parent and subsidiary banks domestically and abroad, reflecting the open and regional nature of Malaysia's banking sector. At the same time, the country is a net external creditor and continues to run current account surpluses, even though we expect the surplus to narrow to 2.0% of GDP in 2020 from 3.3% in 2019 as a result of lower exports due to supply chain dislocations and reduced prices of export commodities, particularly oil. The share of the government's foreign currency-denominated debt is also low, at 3% of total debt.
Lower oil prices and weaker economic activity have reduced inflationary pressures, with Fitch now expecting inflation to average 0.3% in 2020. Monetary policy is therefore likely to remain supportive of economic activity, with Bank Negara Malaysia (BNM) reducing its policy rate by 25bp in January and March to 2.5%. Fitch expects another cumulative 50bp in rate cuts in 2020 as COVID-19 related uncertainty continues.
The banking sector maintains its loss absorption capital buffers, including a common equity Tier 1 ratio of 14.3%, and remains liquid with a liquidity coverage ratio of 149%. However, Malaysia's banking sector outlook has been lowered to negative from stable, reflecting the adverse impact of the pandemic on banks' asset quality and profitability. Aspects of the policy counter-measures, from interest rate cuts to a moratorium on debt repayment, would help mitigate credit stress, but may also weigh on banks' interest margins and liquidity. The pace of economic recovery and the effectiveness of relief measures would be key determinants of banks' asset quality, earnings and capital levels.
ESG - Governance: Malaysia has ESG Relevance Scores of 5 for Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Malaysia has a medium WBGI ranking at the 65th percentile ('A' median: 76th), in part reflecting a recent track record of peaceful political transitions, but continued political uncertainty, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption, although with some high-level cases in recent years.
Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
Fitch's proprietary SRM assigns Malaysia a score equivalent to a rating of 'A-' on the Long-Term Foreign-Currency (LT FC) IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR.
Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
RATING SENSITIVITIES
The main factors that could, individually or collectively, lead to negative rating action/downgrade:
- Weaker prospects for a reduction in government debt in the medium term to levels closer in line with peers, for instance due to an insufficient fiscal consolidation strategy after the coronavirus shock or crystallisation of contingent liabilities.
- Deterioration in governance standards, for example indicated by a lower score for the World Bank governance indicators.
The main factors that could, individually or collectively, lead to positive rating action/upgrade:
- Greater confidence in a sustained reduction in general government debt over the medium term, for instance due to implementation of a strong fiscal consolidation strategy.
- An improvement in governance standards relative to peers, for instance through greater transparency and control of corruption.
Best/Worst Case Rating Scenario
International scale credit ratings of sovereign issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, go to
Key Assumptions
- Global economic trends and commodity prices are expected to develop as outlined in Fitch's Global Economic Outlook (published on 2 April 2020).
- The global tourism industry experiences a gradual recovery extending into 2021 after the initial, sharp shock from the coronavirus pandemic this year.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Malaysia has an ESG Relevance Score of 5 for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch's SRM and are highly relevant to the rating and a key rating driver with a high weight.
Malaysia has an ESG Relevance Score of 5 for Rule of Law, Institutional Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight.
Malaysia has an ESG Relevance Score of 4 for Human Rights and Political Freedoms as strong social stability and voice and accountability are reflected in the World Bank Governance Indicators that have the highest weight in the SRM. They are relevant to the rating and a rating driver.
Malaysia has an ESG Relevance Score of 4 for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Malaysia, as for all sovereigns.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on our ESG Relevance Scores, visit
Malaysia; Long Term Issuer Default Rating; Affirmed; A-; RO:Neg
----; Short Term Issuer Default Rating; Affirmed; F1
----; Local Currency Long Term Issuer Default Rating; Affirmed; A-; RO:Neg
----; Local Currency Short Term Issuer Default Rating; Affirmed; F1
----; Country Ceiling; Affirmed; A
----senior unsecured; Long Term Rating; Affirmed; A-
Malaysia Sukuk Global Berhad
----senior unsecured; Long Term Rating; Affirmed; A-
Contacts:
Primary Rating Analyst
Thomas Rookmaaker,
Director
+852 2263 9891
Fitch (Hong Kong) Limited
19/F Man Yee Building 60-68 Des Voeux Road Central
Hong Kong
Secondary Rating Analyst
Stephen Schwartz,
Senior Director
+852 2263 9938
Committee Chairperson
Paul Gamble,
Senior Director
+44 20 3530 1623
Media Relations: Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: alanis.ko@thefitchgroup.com; Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@thefitchgroup.com.
Additional information is available on
Applicable Criteria
Country Ceilings Criteria (pub. 05 Jul 2019)
Sovereign Rating Criteria (pub. 27 Mar 2020) (including rating assumption sensitivity)
Sukuk Rating Criteria (pub. 22 Jul 2019)
Applicable Model
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
Country Ceiling Model, v1.7.1
1-
Debt Dynamics Model, v1.2.0
1-
Macro-Prudential Indicator Model, v1.4.0
1-
Sovereign Rating Model, v3.11.0
1-
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Status
Endorsement Policy
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