Rulings of high-profile cases may affect Malaysia’s ratings

Further downgrades by other agencies will have a greater impact on the cost of borrowing and servicing the debt

RULINGS of several high-profile cases that seem to raise questions among the public and international observers might further affect Malaysia’s global rating to unfavourable status.

In an email sighted by The Malaysian Reserve, Credit Suisse Malaysia MD and head of equities Stephen Hagger said “three cases of public interest” that have been dropped so far could reduce the country’s global standing.

“It is impossible to prove that a phone call has been made, but it is no secret that any fragile coalition government will have to keep doing backroom deals to stay in power.

Putrajaya / graphic by MZUKRI

“Sadly, the country will pay the price for this, with the recent Fitch Ratings Inc’s downgrade being one such example,” Hagger said in the email.

Fitch recently downgraded its rating on Malaysia’s long-term foreign-currency issuer default rating from A- to BBB+ as it expects the fiscal deficit to remain higher than pre-pandemic levels, given a continuation of support measures and political pressure for higher spending.

“The government has secured passage of core legislation to implement relief measures, including the 2021 budget, but in Fitch’s view, lingering political uncertainty following the change in government last March weighs on the policy outlook, as well as prospects for further improvement in governance standards,” Fitch stated.

In his response, Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz said Fitch’s decision “does not give due justice and credit” to the country’s crisis response efforts and strong economic fundamentals.

AllianceDBS Research Sdn Bhd chief economist Manokaran Mottaian said the government needs to pay more attention to other international credit rating agencies such as S&P Global Inc and Moody’s Investors Service that are likely to revise their ratings.

“We note when Fitch first downgraded its rating from BBB- to BB in September 1998, Moody’s and S&P also downgraded theirs from Baa2 to Baa3 and BBB+ to BBB- respectively during the same month.

“When S&P upgraded Malaysia’s rating from BBB- to BBB during November 1999, Fitch followed suit a month later; followed by Moody’s upgrade 10 months later from Baa3 to Baa2,” said Manokaran in a research report.

Earlier in June, S&P revised Malaysia’s outlook from ‘Stable’ to ‘Negative’, but maintained its rating at A-, on the back of the country’s ongoing higher fiscal spending.

Subsequently, Moody’s also maintained Malaysia’s rating and outlook at A3/Stable early this month.

He added that further credit rating downgrades by other agencies will have a greater impact on the cost of borrowing and servicing the debt that is likely to increase.

“This would, in turn, exert pressure on the government’s nearterm spending; given that government debt and liability are already expected to reach a higher level of 87.3% of GDP by end-2020.

“The likely increase in borrowing costs could lead to economic investment constraints,” he added.

UOB Malaysia senior economist Julia Goh said there was mild sell-off in both the ringgit and longer-dated Malaysian Government Securities (MGS) after Fitch’s announcement last Friday.

The ringgit depreciated by 0.2% to 4.072 against the US dollar from last week’s closing of 4.062, while the seven- and 10-year MGS yield rose 4.3 basis points (bps) to 2.53% and 2.7bps to 2.73% respectively from the same day’s closing of 2.48% and 2.7%.

“We expect this knee-jerk reaction to be temporary as underlying sentiment is firm amid better domestic growth outlook for 2021, sustained low interest rates, mild bond supply concerns next year and expectations of broad dollar weakness.

Anticipations of a gradual recovery in crude oil prices amid global economic reflation will also help reinforce the ringgit,” said Goh in a research report.

The firm reiterates its view for US dollar/ringgit that it will ease to 4.00 by the end of second quarter of 2021 (2Q21) and 3.95 by end 4Q21.

“The upcoming key domestic events to watch are S&P and Moody’s next review on Malaysia’s credit rating, as well as FTSE Russell’s next review of Malaysia’s WGBI (World Government Bond Index) weight in March 2021,” added Goh.

Meanwhile, RHB Research Institute Sdn Bhd expects the bond market to remain supported as bond dynamics are healthy, mainly due to continued support from onshore real money investors and still compelling real yields.


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