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Moody’s revises government of Malaysia rating to stable from positive
KUALA LUMPUR: Moody's Investors Service has affirmed the Government of Malaysia's issuer and senior unsecured bond ratings at A3 and changed the outlook to stable from positive.
The international ratings agency said the main reasons for the revision of the outlook were the weakening of the country’s growth, high system-wide leverage and limited improvement in the fiscal consolidation.
* The deterioration in Malaysia's growth and external credit metrics due to external pressures over the past year.
* Macro-financial risks posed by system-wide leverage, which remains high.
* Moody's expectation that — despite progress on fiscal consolidation — Malaysia's public debt burden and debt affordability will see only limited improvement over the outlook horizon.
The ratings agency also affirmed the A3 senior unsecured ratings to the US dollar trust certificates issued by Malaysia Sovereign Sukuk Bhd, a special purpose vehicle set up by the government.It explained these trust certificates were considered direct obligations of the Malaysian government and its ratings automatically reflected changes to Malaysia's sovereign rating.
Moody's, meanwhile, affirmed the instrument ratings on senior unsecured debt issued by Khazanah Nasional Bhd at A3. The Malaysian government guarantees these instruments.
Moody’s explained the decision to stabilise Malaysia's A3 government bond rating at A3 rather than at A2 balanced the negative impact of changes in the external environment on Malaysia's growth, external balance and reserves since the assignment of a positive outlook in November 2013, together with the risks posed by existing domestic imbalances, against the positive impact of the fiscal consolidation seen since then.
“The assignment of a positive outlook to Malaysia's A3 government bond rating reflected Moody's view that continued improvements in the government's balance sheet could further enhance Malaysia's fundamentals,” it said.
It noted that since then, there has been further fiscal consolidation, including through the implementation of a goods and services tax (GST) in April 2015 and the rationalisation of fuel subsidies.
“However, the impact on the government's balance sheet has been, and will continue to be, limited. That partly reflects changes in the external environment which have reduced government revenues over the period.
“Those environmental changes have also undermined Malaysia's external position, with large capital outflows, a falling current account surplus, sharp exchange rate depreciation and falling reserves,” it added.
Moody’s raised concerns that apart from rising external exposure, material domestic imbalances continue to pose a risk to growth and the financial system.
“Household debt levels remain high by the standards of Malaysia's peers,” it said.
Below is the extract of Moody’s statement:
First driver: External pressures cap potential improvements in credit metrics.
The first driver of the outlook change has been the deterioration in credit metrics due to external pressures over the past year. While lower trade has weighed on economic growth, it has also contributed to a weakened external payments position.
The current account surplus has fallen to a projected 2.1% of GDP in 2015 from an average of 11.0% over the preceding ten years, providing a thinner buffer against volatile capital flows.
In turn, foreign exchange reserves have declined by more than $20 billion since the end of 2014, while the currency has depreciated by more than 20% against the US dollar.
As a result, reserve coverage of cross-border debt servicing requirements over the next year has deteriorated given relatively high levels of external debt. Against an expectation of persistent pressures on the balance of payments, Malaysian policymakers are likely to maintain already reduced external buffers and tolerate greater currency depreciation.
On the other hand, the weaker ringgit has not led to increased debt distress in the corporate and banking sectors given the Malaysian economy's reliance on local currency financing. Similarly, the impact on funding costs to the government has remained muted. In addition, currency depreciation has lowered the potential drain on reserves posed by the significant proportion of external debt denominated in Malaysian ringgit.
Nevertheless, currency depreciation may pose some upside risk for inflation in the near-term, while providing only limited support for exports due to weak external demand.
Second driver: High household leverage poses macro-financial risks.
The second driver of the outlook change is the increased risk posed by the high stock of private sector debt in an environment of slowing growth. Since 2009, household debt has increased by more than 15 percentage points of GDP to around 87% as of end-2014, levels similar to more advanced, higher-income economies. The accumulation of household debt has slowed over the past year, in part due to prudential measures introduced by the central bank.
Corporate debt has not grown as rapidly as household debt, but remains at levels higher than similarly rated emerging markets.
Although the aggregate balance sheets of the household and corporate sectors continue to have adequate asset buffers, slower economic growth and cooling asset prices—particularly, in real estate and equity markets—could stress borrowers' ability to repay debt.
In turn, this could feed back to even more limited support to economic growth from consumption and residential investment. Nevertheless, we expect the banking system to remain largely resilient to a potential deterioration in asset quality.
Third driver: Fiscal iscal consolidation has not led to significant improvement in debt metrics
Although Malaysia likely sustained a sixth consecutive year of fiscal consolidation in 2015—the longest such streak among A-rated countries — it has not led to a significant improvement in government debt ratios. The fiscal deficit has narrowed in each of the last six years to an expected 3.2% of GDP in 2015 from around 6.5%, but continues to be wider than corresponding peer medians. Consequently, the government's debt burden has stabilized below its self-imposed debt ceiling of 55% of GDP, but has not entered into a sustained downward trend.
Much of the deficit reduction has been driven by expenditure consolidation, partly in response to oil price-induced pressures on revenue; in 2016, we expect federal government receipts to fall to its lowest level as a share of GDP since 2000. As a result, debt affordability has continued to worsen with the interest payments-to-revenue ratio remaining at levels more than twice as high as the A-rated median.
Although fiscal space is already increasingly constrained by slowing revenue growth, the government's commitment to a stated goal of a balanced budget by 2020 as spelled out in its current five-year plan, the 11th Malaysia Plan, could be further tested by demands to support the slowing economy.
In addition, rising contingent risks to the government's balance sheet are represented by the continued increase in explicitly guaranteed debt, which rose to 15.1% of GDP as of the first half of 2015 from 11.8% in 2010.
Rationale for the affirmation of the A3 rating
Malaysia has weathered the stresses of the past year with many of its fundamentals largely intact.
Although lower commodity prices, weak consumer and business sentiment, and lacklustre growth among the country's largest trading partners pose prominent downside risks to both exports and domestic demand, we expect Malaysia to continue to grow faster than other A-rated countries this year and over the medium-term.
Macroeconomic stability is anchored by the credibility of the country's central bank, Bank Negara Malaysia, which has exhibited a solid track record of maintaining low inflation and a stable banking system.
Malaysia's inflation performance is supportive of Moody's assessment of the country's institutional strength.
Malaysia's sovereign rating also continues to be supported by the government's favorable debt structure and the depth of onshore capital markets, both of which mitigate the impact of capital account and exchange rate volatility.
As of end-September 2015, foreign-currency denominated liabilities constituted only 3.6% of the government's debt stock, effectively eliminating exchange rate risks from the standpoint of debt repayment.
While non-residents continue to hold about one-third of government debt, large institutional investors — such as the Employee Provident Fund — continue to provide a reliable source of domestic financing.
What could move the rating up/down
The stable outlook suggests that the upside and downside risks are balanced. Nonetheless, upward pressure on the sovereign's rating could arise from a greater convergence in debt metrics with similarly-rated peers, accompanied by improvements in debt affordability and fiscal deficit reduction.
Conversely, a significant worsening in Malaysia's debt dynamics—possibly arising from an inability to manage the impact of lower crude oil and agricultural commodity prices—on the fiscal accounts or the crystallization of large contingent liabilities, could exert downward pressure on the rating.
Country ceilings
Malaysia's long-term foreign currency (FC) bond ceiling is unchanged at A1 and its long-term FC deposit ceiling is A3. Malaysia's short-term FC bond ceiling is also unchanged at P-1, while the short-term FC deposit ceiling was lowered to P-2 from P-1.
These ceilings act as a cap on ratings that can be assigned to the FC obligations of entities other than the government that are domiciled in the country.
The local currency (LC) country risk ceiling is unchanged at A1.
GDP per capita (PPP basis, US$): 25,145 (2014 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 6% (2014 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.7% (2014 Actual)
Gen. Gov. Financial Balance/GDP: -3.4% (2014 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 4.3% (2014 Actual) (also known as External Balance)
External debt/GDP: 67.5%
Level of economic development: Very High level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On Jan 7, 2016, a rating committee was called to discuss the rating of the Government of Malaysia.
The main points raised during the discussion were: The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become increasingly susceptible to event risks.
Other views raised included: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/framework, have materially decreased.
The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015.
