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Showing posts with label Fitch ratings. Show all posts
Showing posts with label Fitch ratings. Show all posts

Saturday 20 July 2019

Fitch affirms Malaysia’s rating at A- with stable outlook, but heed the economic warning


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Fitch Ratings

KUALA LUMPUR: Fitch Ratings has affirmed Malaysia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-' with a Stable Outlook.

According to a statement posted on the interantional rating agency's website on Thursday the key rating drivers were its strong and broad-based medium-term growth with a diversified export base.

However, it also was concerned about its high public debt and some lagging structural factor.

Main points:

* GDP to grow at 4.4% in 2019 and 4.5% in 2020

* Global trade tensions to impact economy

* Private consumption to hold up well, public investment to pick up

* Outlook for private investment is more uncertain

* Weak fiscal position relative to peers weighs on the credit profile

* General government debt to fall from 62.5% of GDP in 2019 to 59.3% in 2021

* Malaysia relatively vulnerable to shifts in external investor sentiment

* Fitch expects another 25bp rate cut in 2020 on the back of continued external and domestic uncertainty.

* Banking sector fundamentals remain broadly stable

Fitch said Malaysia's ratings balance strong and broad-based medium-term growth with a diversified export base, against high public debt and some lagging structural factors, such as weak governance indicators relative to peers.

The latter may gradually improve with ongoing government efforts to enhance transparency and address high-profile corruption cases.

Fitch expects economic growth to slightly decelerate in the rest of this year as a result of a worsening

external environment, but to hold up well at 4.4% in 2019 and 4.5% in 2020.

Malaysia is a small open economy that is integrated into Asian supply chains, but it also has a well-diversified export base, which helps cushion the impact from a potential fall in demand in specific sectors.

Global trade tensions are likely to have a detrimental effect on Malaysia's economy, as with many other countries, but this may be partially offset by near-term mitigating factors, such as trade diversion, in particular towards the electronics sector.

Private consumption is likely to hold up well and public investment should pick up again in the next few years after the successful renegotiation of some big infrastructure projects, most prominently the East Coast Rail Link.

However, the outlook for private investment is more uncertain. FDI inflows were strong in the past few quarters, but investors will continue to face both external trade and domestic political uncertainty.

The Pakatan Harapan coalition took office in May 2018 with very high expectations. It has set a number of policy initiatives in motion, but holds only a small majority in parliament and has seen its previously high public approval rates fall significantly.

Uncertainty about the timing and details of the succession of the 94-year old Prime Minister Tun Dr Mahathir Mohamad also continues to linger.

A weak fiscal position relative to peers weighs on the credit profile. The government's repeal of the Goods and Services Tax (GST) and replacement with the Sales and Service Tax (SST) soon after it took power has undermined fiscal consolidation.

The government aims to offset the revenue loss through measures to strengthen compliance, the introduction of a sugar tax and an increased stamp duty. Its fiscal deficit target for 2019 of 3.4% of GDP, which we believe will be met, includes a special dividend from Petroliam Nasional Berhad (PETRONAS, A-/Stable).

Political pressures and growth headwinds could motivate the government to increase its current spending, but we believe that if it does so, it would seek additional revenues or asset sales to contain the associated rises in the deficit and public debt.

Fitch estimates general government debt to gradually decrease from 62.5% of GDP in 2019 to 59.3% in 2021.

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-2018 to 9.2% and 2.2% of GDP, respectively.

The government guaranteed another 9.2% of GDP in loans it does not service. The greater clarity provided by the government last year on contingent liabilities negatively influenced the debt ratios, but this is partly offset by the improved fiscal transparency.

Significant asset sales, as intended by the government, could result in a swifter decline in the debt stock than its forecast in its base case.

Progress in implementing reforms that institutionalise improved governance standards through stronger checks and balances, and greater transparency and accountability would strengthen Malaysia's business environment and credit profile.

The World Bank's governance indicator is still low at the 61st percentile compared with the 'A' category median of 76th.

An important change is that all public projects are now being tendered, which increases transparency, creates a level-playing field and should bring down project costs. Prosecution of high-profile cases may also help reduce corruption levels over time.

Malaysia has been running annual current account surpluses for the past 20 years, and Fitch expects it to continue to do so in the next few years, even though the surplus is likely to narrow to below 2% of GDP.

Foreign-reserve buffers were US$102.7 billion (4.7 months of current account payments) at end-June 2019, while other external assets are also significant, including from sovereign wealth fund Khazanah.

Malaysia is nonetheless relatively vulnerable to shifts in external investor sentiment, partly because of still-high foreign holdings of domestic government debt, although these have fallen to 21% from 33% three years ago.

Moreover, short-term external debt is high relative to reserves, although a significant part of this constitutes intra-group borrowing between parent and subsidiary banks domestically and abroad, reflecting the open and regional nature of Malaysia's banking sector.

Monetary policy is likely to remain supportive of economic activity, after Bank Negara Malaysia's (BNM) reduced its policy rate by 25bp to 3.0% last May, which seemed a pre-emptive response to increased external downside risk.

Inflationary pressures are limited with headline inflation at 0.2% in May 2019, still low due to the repeal of the GST and lower domestic fuel prices.

Fitch expects another 25bp rate cut in 2020 on the back of continued external and domestic uncertainty.

Banking sector fundamentals remain broadly stable. Elevated, but slightly declining household debt at 83% of GDP and property-sector

weakness should be manageable for the sector, but present a downside risk in case of a major economic shock.

The sector's healthy capital and liquidity buffers, as indicated by the common equity Tier 1 ratio of 13.4% and liquidity coverage ratio of 155% at end-May 2019, help to underpin its resilience in times of stress.

SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)

Fitch's proprietary SRM assigns Malaysia a score equivalent to a rating of 'BBB+' on the Long-Term Foreign-Currency (LT FC) IDR scale.

In accordance with its rating criteria, Fitch's sovereign rating committee decided not to adopt the score indicated by the SRM as the starting point for its analysis because it considers it likely that the one-notch drop in the score to 'BBB+' since March 2018 will prove temporary.

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, individually or collectively, could trigger positive rating action are:

* Greater confidence in a sustained reduction in general government debt over the medium term.

* An improvement in governance standards relative to peers, for instance through greater transparency and control of corruption.

The main factors that could trigger negative rating action are:

* Limited progress in debt reduction, for instance due to insufficient fiscal consolidation or further crystallisation of contingent liabilities.

* A lack of improvement in governance standards

KEY ASSUMPTIONS

* The global economy and oil price perform broadly in line with Fitch's Global Economic Outlook (June 2019). Fitch forecasts Brent oil to average USD65 per barrel in 2019, USD62.5 in 2020 and USD60 in 2021.

The full list of rating actions is as follows:

Long-Term Foreign-Currency IDR affirmed at 'A-';

Outlook Stable

Long-Term Local-Currency IDR affirmed at 'A-';

Outlook Stable

Short-Term Foreign-Currency IDR affirmed at 'F1'

Short-Term Local-Currency IDR affirmed at 'F1'

Country Ceiling affirmed at 'A'

Issue ratings on long-term senior unsecured local-currency bonds affirmed at 'A-'

Issue ratings on global sukuk trust certificates issued by Malaysia Sukuk Global Berhad affirmed at 'A-'

But heed of Fitch’s economic warning


Fitch Ratings has affirmed Malaysia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-' with a Stable Outlook.
Fitch Ratings has affirmed Malaysia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-' with a Stable Outlook.

The international Fitch Ratings has given us a warning on the outlook for the Malaysian economy, which we should not ignore.

In preparing for the 2020 Budget, the government’s economic and financial planners should take heed of this friendly warning and act sooner rather than later. We should not let this warning pass, without having more consultations with Fitch, on how serious their constructive criticism could turn out to be.

Fitch Ratings has affirmed Malaysia’s long-term foreign currency issuer default rating at A-, with a stable outlook. But we must seriously take note of the several reservations that Fitch has made, and consider and monitor them, to remain on even keel and progress further.

What are these warnings?

High public debt

The national debt is now confirmed by Fitch to be high. By whatever standard of measurement used – by us, the IMF or the World Bank and other agencies – there is now consensus that our debt is indeed high, although still not critical.

However, the debt has to be watched closely. We have to ensure better management of our budget expenditures and strive to strengthen our budget revenues, to reduce the pressure to borrow more in the short to medium term.

Some lagging structural factors

The structural factors would refer to our need to raise productivity, increase our competitiveness and meritocracy and strengthen our successes, in combating corruption and cronyism.

How far have we advanced to deal effectively with these longstanding structural issues? In the minds of our foreign and even domestic investors, how successful have we been compared to the previous regime?

Fitch expects the economy to slow down to 4.4% this year and 4.5% in 2020. With the US -China trade war looming large and the general world economic uncertainty, investors can get even more jittery and hold back their investment plans. Thus, the low economic growth rates for this year and ahead should not be ruled out.

If the economy softens further to around 4% per annum, the implications of unemployment, and especially for our graduates, could be worrisome. The small and medium businesses and farmers and fishermen and smallholders in our plantation industries could suffer much from any slowdown.

But we are still slow and are struggling in trying to restructure the economy. We have not yet adopted major changes of transformation of the economy, which is largely raced-based to the vital requirement, to become more needs-based in our policies and implementation.

We need a New Economic Model but it has been difficult to adopt it as soon as possible.

Weak governance relative to peers

To be fair, many measures have been taken to strengthen the institutions of government. We have seen this in the parliament select committees, the Election Commission, the MACC and the civil service and other institutions.

We cannot do too much too soon, as good governance takes much longer to restore and build, after several decades of neglect in the past. But our people and investors are somewhat impatient for more rapid changes for better governance.

Fitch has, however, subtly warned us to compare our “weak governance relative to our peers”. Thus, we have to take note of the more rapid progress made by our neighbouring countries in Asean, like Vietnam, Thailand and Indonesia and, of course, Singapore, to measure our real success in good governance.

Investors have the whole world to choose from, to put their money where their mouth is. They also need not look at the comfortable physical climate and tax incentives alone to be attracted to invest in Malaysia.

Racial harmony, religious understanding and political stability are also major considerations for both domestic and foreign investors and professionals. This is where the reduction of the brain drain is important. But we continue to have strong outflows of brain power, which is debilitating.

Fitch warns that the PH government holds only a small majority in Parliament and has seen its previously high public approval rates fall significantly. Fitch’s assessment is quite correct. This has been due to too much politicking and allegation of sex scandals. All this does not give confidence to investors and even consumers who will be dampened in their enthusiasm to increase consumption and investment.

Fitch Ratings has subtly and politely warned us of the challenges we are facing. It has also emphasised in its usual guarded fashion the essential need for us to take heed of their advice and warnings, to make the necessary socio-economic and political adjustments, changes and even transformation, without undue delays.

We could face a real slowdown all round if we don’t consolidate our strengths to overcome our lingering weaknesses to forge ahead for a better Malaysia in the future – for all Malaysians.

By Tan Sri Ramon Navaratnam, chairman of the Asli Centre for Public Policy.

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Saturday 3 August 2013

Fitch downgrade bad for Malaysian stockmarket

People in the market are aware of the issue revolving around Fitch Ratings’ downgrade, hence it did not result in any immediate implication.

The situation, however, is a temporary hiccup, say market observers 

THIS week was a rough one for Malaysia. The stock market fell the most in seven weeks, the ringgit dropped to the lowest in three years and the yield of Malaysian government’s 10-year debt paper increased to the highest point since January 2011. That reaction stems from Fitch Ratings downgrading its outlook for Malaysia’s credit rating.

Market observers agree that the revised outlook is bad news for the stock market, but they also agree that the situation is a temporary hiccup.

The FTSE Bursa Malaysia KL Composite Index (KLCI) closed 1.25% or 22.46 points lower at 1,7772.62 on Wednesday. But on Thursday, the local bourse rebounded to close 0.3% or 5.2 points higher to 1,777.82. It continued its uptrend yesterday, advancing 0.26% or 4.69 points to 1,782.51 yesterday.

Inter-Pacific Research Sdn Bhd head of research, Pong Teng Siew tells StarBizWeek over the phone that there was a massive “knee-jerk” pullout by foreign funds in the equity market the day after the revised outlook by Fitch Ratings.

“On Wednesday, RM436.5mil foreign selling took place and it continued on Thursday at RM262.1mil,” he says.

He explains while foreign investors are prone to a cash out their positions in the market, the situation is instead cushioned by the local investors.

Yet, the sell-off could represent a temporary hiccup because Malaysia’s public finance (the reason for Fitch Ratings to downgrade its outlook) is considered old news, Pong notes.

He adds that people in the market are aware of the issue, hence it did not result in any immediate implication. “It would not hold the market from advancing”.

Areca Capital chief executive officer Danny Wong says that the stock market will bounce back again because the country’s strong economic fundamentals and corporate earnings are still robust.

“Those factors will drive the stock market to recovery,” he adds.

He notes that the foreign investors may use the downgrade as a reason to exit Malaysia.

“There is a concern that the downgrading may affect foreigners to exit Malaysia in a big way,” he says, noting that the impact could be minimal in the stock market but a greater concern for the bond market.

Public Finance

High debt levels have been a growing concern in recent years for the country, as the government’s debt-to-GDP ratio is among the highest in South-East Asia.

Malaysia debt-to-GDP ratio is almost touching its ceiling limit of 55%.

The country’s budget deficit had widened to 4.7% of GDP in 2013 from 3.8% in 2011, Fitch notes. It said the downgrade in its outlook was because it feels Malaysia’s public finances are its “key rating weakness”.

“I believe that the Government will pursue its target to reduce the budget deficit by 4% this year, or at least show a sign of reduction,” says RAM Holdings Bhd chief economist Dr Yeah Kim Leng.

The ringgit has depreciated further to RM3.25 against the US dollar as the greenback strengthens.

CIMB Research in a report says the depreciation of the ringgit benefits exporters, such as plantation, rubber glove and semicon players, as well as those with foreign currency revenues.

“Malaysia’s current account balance is expected to narrow to around 3% of GDP or lower this year,” its chief economist Lee Heng Guie tells StarBizWeek.

Since the first quarter, the current account surplus had narrowed to 3.7% of GDP. In 2012, current account surplus stood at 6.1% of GDP compared with 14.4% of GDP in 2005 to 2010.

He adds that the downward pressure on the current account is due to the slowdown in export growth and an increase in imports as the domestic demand grows.

“Going forward, we expect two developments in the balance of payments to influence the direction of Malaysia’s current account, which includes export earnings volatility and private investment growth picking up as a result of the Economic Transformation Programme implementation and import of investment capital goods for the construction, oil & gas and service sectors.

“The sustained inflows of private capital and a large war chest of foreign reserves will provide a strong buffer against the weakness in the current account,” he says.

He notes a deterioration in the balance of payments should not be a cause for alarm. “It is the speed, magnitude and cause of deterioration that should warrant a pre-emptive action”.

“Nevertheless, further erosion of the current account surplus and given that Malaysia also incurs persistent years of budget deficit, the emergence of ‘twin deficits’ if they materialise could flag investors’ concerns about their sustainability and net external financing issues to bridge the gap. This underscores the urgency for the government to take remedial action to contain the budget deficit,” he explains.

Response

On Thursday, Fitch Ratings head of Asia-Pacific sovereign Andrew Colquhan over a conference call said that a downgrade in Malaysia’s credit rating is “more likely than not” over the next 18 months and 24 months, after cutting the Malaysia’s outlook, highlighting a concern over the Government’s commitment for fiscal consolidation and budget reforms step.

“It is difficult to see the Government pressing forward any of those steps after the general election,” he says, adding that the rating could reverse if action was taken to address the fiscal issue.

Meanwhile, on Thursday, Prime Minister Datuk Seri Najib Tun Razak gave his assurance that the Government would address the concerns over the Fitch Ratings outlook in his budget speech this year.
“We have already put in place a fiscal committee, which is looking into some of this challenges that we face, and all these will be addressed shortly, especially in the forthcoming Budget,” he said yesterday.
Budget 2014 is expected to be tabled on Oct 25.

Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz says Malaysia has the capacity and capability to address its fiscal vulnerabilities in a gradual and sequenced manner.

“Malaysia still has time to do it, but of course it is now more urgent because the global environment has become more challenging,” she said, adding that policymakers were putting emphasis on increasing national resilience and boosting its potential to sustain economic growth.

The Government has targeted to reduce budget deficit to 4% this year, 3.5% in 2014 and 3% by 2015.

Bond yields

The revised outlook by Fitch also pushed up the yield on the 10-year Malaysian Government Securities (MGS) to the highest since January 2011.

On Wednesday, the yield increased to 4.13% and remain above 4% on Thursday.

“The pullout by foreign funds started in June 2012 judging from the decrease in the foreign holdings in MGS to RM137.9bil in June from RM144.5bil in May.

“The downgrade of Malaysia’s outlook by Fitch Ratings has compounded the impact as local bond market is still digesting what had transpired in the US Treasuries (UST) market on possible tapering of assets purchase programme by the US Federal Reserve,” said Bond Pricing Agency Malaysia chief executive officer Meor Amri Meor Ayob in an email reply.

He says that the local bond market is sensitive to the spread between UST and MGS. “The UST yields have spiked up substantially for the past two months, so have the MGS yields”.

“That being said, in the longer-term perspective, the MGS yields will depend on the health of the economic fundamentals, such as GDP growth, inflation outlook, current account balance as well as fiscal and monetary policy,” he notes.

Zeti says there is not reason to overreact over the recent sell-off of Malaysian bonds.

She adds Malaysia is a highly open market and that it could cope with such volatility because its financial market is one of the most developed among emerging economies.

By INTAN FARHANA ZAINUL - The Star/Asia News Network

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Thursday 1 August 2013

Fitch downgrades Malaysia due to high government debts and spending


PETALING JAYA: Fitch Ratings, after cutting Malaysia’s credit rating outlook to “negative”, sending the stock market and the ringgit reeling, has said it is more likely to downgrade the country’s rating within the next two years on doubts over the Government’s ability to rein in its debt and spending.

The Government, in response to Bloomberg News, rebutted such concerns and said it was committed to fiscal responsibility, stressing that it would rationalise subsidies and broaden the tax base.

It said the economy was fundamentally healthy, with strong growth and foreign currency reserves.

Standard & Poor’s had last week, however, reaffirmed its credit rating on Malaysia and said it might raise sovereign credit ratings if stronger growth and the Government’s effort to reduce spending resulted in lower-than-expected deficits. “With lower deficits, a significant reduction in Government debt is possible,” it said.

It might lower its rating for Malaysia if the Government fails to deliver reform measures to reduce its fiscal deficits and increase the country’s growth prospects.

“These reforms may include implementing the Goods and Services Tax or GST, reducing subsidies, boosting private investments and diversifying the economy,” said S&P.

The downgrade in Malaysia’s rating outlook by Fitch on Tuesday took a toll on the capital markets, and sent the ringgit to a three-year low against the US dollar.

The FTSE Bursa Malaysia KL Composite Index closed 1.25% or 22.46 points lower at 1,772.62, and the ringgit fell to RM3.2425 against the greenback, its lowest since June 30, 2010.

The bond market, where foreign shareholding recently was at an all-time high, also saw yields climb dramatically. The yield for the 10-year tenure for Malaysian Government Securities rose seven basis points yesterday to 4.13%. The yield for the 10-year Government bond has climbed 77 basis points since April 30.

In a conference call yesterday afternoon, Fitch Ratings warned that a downgrade in Malaysia’s credit rating was “more likely than not” over the next 18 to 24 months. It highlighted Malaysia’s public finances as its key issue for the rating weakness.

Its head of Asia-Pacific sovereigns Andrew Colquhoun said over the phone that there was a concern over the Government’s commitment to fiscal consolidation after the May general election (GE).

“It is difficult to see the Government pressing forward with any fiscal reform steps or budget reforms,” he said, adding that the rating would reverse if any action was taken.

CIMB Research, in a note by its head of research Terence Wong and economics research head Lee Heng Guie, said Fitch’s revised outlook on the country was “bad news” for the stock market.

“While we believe there will be a knee-jerk selldown, the average lifespan for a rating outlook is about 18 to 24 months before a downgrade is enforced, giving Malaysia time to prevent that,” the report said.

They said the Fitch downgrade was a warning to Malaysia to improve its macroeconomic management, and was of the opinion that the Government had time to get its house in order.

“We believe the authorities will take the warning seriously and move to address any weaknesses,” they noted.

Both Wong and Lee, however, felt that any weakness in the stock market was an opportunity for investors to accumulate shares.

“The depreciation of the ringgit benefits exporters, such as plantation, rubber glove and semiconductor players, as well as those with foreign currency revenues,” they said.

Meanwhile, Areca Capital chief executive officer Danny Wong told StarBiz that foreign investors might use the downgrade as a reason to exit from Bursa Malaysia.

“There is a concern that the downgrading may affect foreigners to exit Malaysia in a big way. Hence, it created a ‘knee-jerk’ reaction to the market.

“However, I think the impact would be minimal on the equity market but the concern is on the bond market because of the 33% foreign ownership,” he said, adding that the outlook by Fitch was earlier than expected since the 2014 budget is set to be announced in two months’ time.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng said the cut in the outlook by Fitch had rattled the market, but feels the country’s fundamentals such as gross domestic product (GDP) growth, high foreign reserves and current account surplus would soothe worries over any rating concerns.

“I believe the Government will pursue its target to reduce the budget deficit by 4% this year, or at least show a sign of reduction.

“However, Malaysia’s current account balance will narrow further by end-2013 due to a weakening in exports, although a deficit account is unlikely to happen,” he opined.

High debt levels have been a growing concern in recent years in Malaysia, as the Government debt-to-GDP ratio is among the highest in South-East Asia. At 53.5% as at the end of last year, it is higher than the 25% in Indonesia, 51% in the Philippines and 43% in Thailand, noted a report by Bloomberg.

The ratio for Malaysia is almost to the debt ceiling limit of 55%.

Fitch, it its notes accompanying its decision to downgrade Malaysia’s credit outlook, said the country’s budget deficit had widened to 4.7% of GDP in 2012 from 3.8% in 2011, led by a 19% rise in spending on public wages ahead of the May GE.

It believes that it will be difficult for the Government to achieve its 3% deficit target for 2015 without additional consolidation measures.

By INTAN FARHANA ZAINUL intanzainul@thestar.com.my