I think I have written many times about this. This time, no further comments. Let me just outline and explain Fitch Rating’s latest rating for Malaysia published in all major medias on 1st July 2015. On an overall basis, it’s considered a very positive news. Fitch Ratings did not downgrade Malaysia to BBB but it has even revised the outlook from negative to Stable. Long Term foreign currency issuer default rating (IDR) remained at A- and local currency IDR at A. (Yes, Ringgit is considered STRONG, still.) It is a welcome relief and suddenly, everything seemed better, both BURSA and Ringgit.
Why the current rating? Source: Fitch Ratings
– Government’s fiscal deficit continue to fall from 4.6% of GDP in 2013 to 3.8% of GDP in 2014. General government debt/GDP declining from 54.7% in 2013 to 53.9% as at end 2014.
– Goods and Services Tax (GST) and fuel subsidy reform is supportive of fiscal finances and this is expected to help the economy further even with lower oil prices.
– Malaysia’s external liquidity ratio was above the ‘A’ median of 104.6% and it is expected to improve over the forecast period.
– Current account surplus is about 4% in 2014 and this is above the median of other ‘A’ rated economies at 1.7%.
– Malaysia is still GROWING with reasonable strong real GDP growth and low inflation volatility.
– Average of five-year real GDP is at 5.8% and this is FASTER than the median of other ‘A’ rated sovereigns of just 3.1%.
To that friend who kept ignoring every single of these points, come on, this is NOT from anyone in Malaysia but is from Fitch. Or, as usual, Malaysia has paid Fitch Ratings to write such positive account?
What can lead to a negative rating in the near future?
– If government’s targets in terms of structural budgetary reform is NOT progressing well.
– Shock to the interest rates or employment which is so bad that it affects the debt service capacity. In other words, “could not pay debts.”
– Deterioration in the balance of payments or investor sentiment that impairs the sovereign’s external balance sheet.
Please, read these three reasons and memorise them. Nothing here says that due to 1MDB, Malaysia will slip into a crisis. Oh yeah, for that one particular friend working in Singapore who kept saying that Malaysia is about to become Greece, I hope he reads this too.
What about things that would help to lift the rating into positive territory?
– As long as government’s own commitment on containing public indebtness continues, this should install confidence and resilience on reducing the deficit position further.
– Sustained growth without the build-up of macro imbalances.
– Narrowing of structural weaknesses relative to peers including development indicators and governance. (Yes, this is where it includes the 1MDB’s issue which should be quickly solved, irregardless whom we hate or whom we believe)
All these are based on key assumptions that the global economic remain stable and there are no sudden escalation of regional or geopolitical disputes to a level that disrupts trade and financial flow.
No conclusion, just read as many other articles as you want and understand what is really happening. The current Ringgit does not reflect its true value based on the many fundamentals which has shown that in many aspects, Malaysia remain stronger than many other A rated economies. Would we be downgraded in the future? Of course the possibility is there. Anyone who said no way must be dreaming. As at 1st July, the sun is shining brightly and the dark clouds are nowhere to be seen, for now. Happy investing.
written on 1 July 2015
Next suggested article: What’s the basis my dear Fitch Ratings?
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