KUALA LUMPUR: The government has been making significant progress in addressing uncertainties about Malaysia’s medium-term outlook after the 2018 general election, says Fitch Ratings.
The government had faced a difficult task since taking office to reassure investors of policy continuity amid persistent concerns about political stability, fiscal consolidation and the outlook for economic growth, it added.
“The Pakatan Harapan coalition has made significant strides in improving Malaysia's governance standards since taking office, which has helped to bolster the country's credit rating.
“It has notably improved fiscal transparency and moved to tackle corruption scandals such as 1Malaysia Development BhdD. This has been reflected in a jump in its World Bank governance indicators, the biggest improvement among Fitch-rated sovereigns over the last year,” Fitch said in a statement late last week.
The rating agency said there was potential for further improvement as Malaysia's governance indicators remained below those of its “A-“ rated peers.
In a video interview with Fitch released last week, Minister of Finance Lim Guan Eng emphasised the government's commitment to fiscal consolidation over the medium term in light of Malaysia's relatively high public debt at 65 per cent of gross domestic product (GDP).
Fitch said in its 2020 Budget announced last October, the government had set a deficit target of 3.2 per cent, which Lim stressed balanced the need to support growth against the need to narrow the deficit over time.
“The perception of the PH administration among foreign investors is particularly significant for Malaysia as foreign-investor holdings of domestic government bonds amount to around 20 per cent of the total, albeit down from a high of 33 per cent in 2016 and less than Indonesia's 39 per cent.
“Foreign direct investment could also serve to support faster economic growth. Malaysia has potential to benefit from the ongoing relocation of export-oriented manufacturing from China,” Fitch noted.
Meanwhile, Malaysia's foreign currency issuer rating has been upgraded to A+ from A previously with stable outlook by Rating and Investment Information Inc (R&I).
The firm also affirmed Malaysia's domestic currency issuer rating at A+ with stable outlook, and its foreign currency short-term debts of a-1.
R&I said the country's fiscal balance was on an improving trend, while the government debt ratio had stabilised.
The government's institutional reform would help enhance fiscal transparency and maintain discipline, the agency said in a statement last Friday.
R&I said Malaysia's economy had been supported by buoyant private consumption last year, although exports and investment decreased due primarily to lower oil prices and a slowdown in the semiconductor market.
“Real GDP is projected to grow around 4.5 per cent in 2019. In anticipation of recovery in exports and private investment, the government estimates real GDP growth for 2020 at 4.8 per cent, which is slightly higher than the consensus forecast."
R&I expects the country's real GDP growth to keep hovering in the mid 4.0 per cent range, benefiting from solid domestic demand.
However, it said attention should be paid to developments in the economies and trade relations of the US and China, two major export destinations for Malaysia.
“There is some indications that companies have sought to relocate their production to Malaysia due to the US-China trade friction. Indeed, amounts of approved investments from the US increased significantly in 2019, primarily for semiconductor-related industries.”