STRONG fiscal consolidation efforts and the removal of fuel subsidies have raised the probability of an upgrade of Malaysia’s sovereign rating.
The Goods and Services Tax (GST), lower subsidy bill and stabilisation of public debt could prompt the “Big Three” sovereign rating agencies to upgrade the country’s current outlook.
Economists describe the recent fiscal decisions by the government as credit positive and a “statement of fiscal responsibility” to the world’s top three sovereign rating agencies.
OCBC Bank economist Wellian Wiranto believes that the fiscal consolidation efforts should be lauded and “potentially rewarded with rating changes”.
“On one side, we have seen revenue diversification efforts on track with the GST implementation soon.
“On the other side, we are seeing more efforts to curb wasteful expenditure.
Rounds of subsidy cuts were helpful but the icing on the cake is the bold move to rid Malaysia of fuel subsidies altogether,” he said. Michael Wan of Credit Suisse pointed out that Moody’s has the country on “positive” outlook.
“It could be the next to upgrade the country.
The recent move by the government significantly lowers the probability of future downgrades by Fitch Ratings (which has Malaysia on ‘negative’ outlook),” he said in reference to the reforms and reduced government contingent liabilities.
In July, Standard & Poor’s affirmed its “A-” long-term and “A-2” short-term foreign currency sovereign credit ratings on Malaysia and indicated that it may raise the ratings if the growth is strong and the fiscal deficit is reduced.
In its 2015 outlook on global sovereigns, Moody’s placed Malaysia (A3 “positive”), along with the Philippines, on the positive outlook as it termed the regional credit quality as positive for sovereigns, financial institutions and corporations over the next 12 months.
In its latest heat map, Malaysia was flagged “pink” in its external vulnerability indicator, gross borrowing requirement and government debt ratio of gross domestic product (GDP).
CIMB Investment Bank economist Julia Goh agreed that government efforts to push for GST and subsidy rationalisation, and in managing debt and fiscal deficit have been credit positive.
“In the near term, an upgrade in outlook is likely but they may wait longer before revising our sovereign ratings.
“To qualify for an upgrade, our key macros (growth, debt and fiscal ratios) need to improve and reach the rating agencies’ median targets for ‘A’ range sovereigns.”
Another factor which Malaysia would have to watch out for next year is the global oil prices, said Bank of America Merrill Lynch economist Dr Chua Hak Bin.
If prices do not recover, it would risk a miss on the fiscal deficit target of three per cent next year.
The collapse in global oil prices may hit oil-related fiscal revenue (such as oil royalties, petroleum income tax and Petroliam Nasional Bhd dividends), which accounts for about 30 per cent of the total revenue, he added.
Public debt has also stabilised at about 55 per cent of GDP, while quasi-public debt, inclusive of government guarantees, has also stabilised in recent quarters.
Meanwhile, another economist warned that with external demand still weak, Malaysia has to ensure that it maintains a current account surplus or risk a twin deficit situation which would impact the sovereign rating.