KUALA LUMPUR (Feb 22): Fitch Ratings has affirmed Malaysia's long-term foreign-currency issuer default rating or IDR at 'A-', which reflects higher growth rates than its peer median and a net external creditor position that is supported by steady current account surpluses and large external assets.

The rating agency also kept its outlook on the country at 'stable'.

In a statement, it said Malaysia's Budget 2019's medium-term fiscal targets are less ambitious than those of the previous government, due in large part to anticipated net revenue loss of around 1% of gross domestic product (GDP) from the removal of the goods and services tax (GST) and its replacement with the sales and service tax (SST).

"Wider deficits and debt levels are negative for the credit profile, but are offset somewhat by steps announced in the budget to improve fiscal transparency and public debt management," Fitch said in a statement.

But Fitch sees downside risks to the government's targeted deficit of 3.4% of GDP for 2019, saying the 2019 budget is based on an optimistic oil price assumption of US$70 (RM285.37) per barrel, above Fitch's forecast of US$65 per barrel.

The budget is also based on implementation of additional revenue-raising measures that may face political constraints, and on optimistic growth assumptions, it said. "However, Fitch assumes expenditure cutbacks will offset any revenue shortfall, and forecasts a general government deficit of 3.4% of GDP in 2019 (current 'A' median -1.7%), in line with the authorities' target. Substantial non-oil revenue measures would be required for the government to meet its medium-term deficit targets unless oil prices recover, posing a risk to the fiscal outlook in Fitch's opinion."

On debt, Fitch expects general government debt-to-GDP to stabilise at around 62% in 2019 and 2020, above the current peer median of 49%. Its debt numbers include officially reported committed government guarantees.

"Beyond the fiscal risks outlined above, there are risks to debt containment from contingent liabilities related to public-private partnerships which may migrate to the sovereign balance sheet as the government continues to improve the transparency of public finances," it noted.

Fitch also expects weaker export performance and slowing investment activity to slow Malaysia's growth to about 4.5% in 2019 and 2020, from 4.7% in 2018, "but to remain above peers", as exports outlook is clouded by trade tensions between the US and China, and Fitch's own expectations of low oil prices.

But it expects private consumption to remain supportive of growth due to favourable labour market conditions and the government's plans to disburse income tax and GST refunds of around RM37 billion during the year. "The growth outlook is subject to downside risk, as elsewhere in the region, from the slowdown in China and a further escalation of trade tensions with the US," it added.

While Fitch said sustained current account surpluses have helped Malaysia retain its net external creditor position — estimated at 14.2% of GDP at end-2018, compared with current rating peer's net debt position of 16.8% — it noted that the surplus declined to 2.3% of GDP in 2018 from 3% in 2017, on weaker exports of electronics and commodities. It expects the surplus to narrow further in 2019 as demand for some key exports such as electronics, oil and liquefied natural gas will likely stay weak.

The country is also vulnerable to shifts in external investor sentiment because of its high short-term external debt, high foreign holdings of government debt, and an international liquidity ratio of just over 100%.

Fitch further noted that Malaysia's rating is "constrained by high government debt, low per capita income levels and weak standards of governance relative to rating peers".

"One of the key campaign promises of the current administration was to set up a royal commission of inquiry into recent corruption scandals and to further improve the transparency of public finances. These measures could bode well for transparency and governance, although the improvements may take time to materialise," it added.