KUALA LUMPUR (Feb 12): RAM Ratings said Malaysia’s 2014 economic growth of 6% has reinforced its assessment of the country, although the nation’s sizeable contingent liabilities continue to constrain its sovereign rating.
In a statement today, RAM has reinforced its assessment of the country’s sovereign ratings at gA2(pi) and seaAAA(pi) on its global and ASEAN rating scales, respectively.
The rating firm said the growth of 6% announced by Bank Negara Malaysia today, came in higher than its previous forecast of 5.8%.
RAM noted robust domestic demand growth had been a key driver of growth, despite various cooling measures.
“That said, there are short-term challenges to the country’s economic and fiscal prospects, due to the recent increase in global growth volatility, which had coincided with lower energy prices,” it added.
RAM said the outlook on the ratings is stable, in view of Malaysia’s external strength and ongoing reforms that have gradually improved its fiscal position.
“Economic activity is expected to moderate but remain resilient at 5.3% in 2015, supported by the continued recovery of exports and private consumption growth of 5.8%,” it added.
Meanwhile, the rating agency projected an improvement in Malaysia’s debt levels — with an improvement of 1.5 to 1.8 percentage points of the ratio — as the fiscal deficit narrows.
While this would be a welcome development for Malaysia, its sizeable contingent liabilities, which stands at 15.7% of gross domestic product (2H2014: 15.7% of GDP), continue to constrain its ratings, according to RAM.
“The country’s sovereign ratings may face downward pressure, if negative externally-driven factors cause a significant deterioration in its economic profile and fiscal position,” it said.
Conversely, RAM said Malaysia’s sovereign ratings may be revised upwards, should there be a material improvement in its fiscal position.
Specifically, the assessment in this regard would focus on the ability of the government to reduce its debt and risks associated with its contingent liabilities, without significantly affecting economic growth.
According to RAM, even after a one-off price adjustment due to the implementation of the Goods and Services Tax (GST) in April 2015, inflation is only expected to accelerate to 3.6%, compared to 3.2% in 2014, balanced by lower domestic fuel and energy costs.
“Malaysia’s external position is commendable, as its current account surplus remained sizeable at 4.6% of gross domestic product (GDP) in 2014 — favourable compared to that of peers,” it added.
Despite lower fuel prices, the rating agency said Malaysia’s current account in 2015 — where energy exports will form a fifth of total export earnings — is projected to remain in surplus (2.5% of GDP), due mainly to its diversified industrial structure and the weaker ringgit.
In addition, RAM said the nation’s external buffers are sufficient to weather near-term external volatility.
“Its foreign reserves, which were valued at US$110.6 billion as at January 2015, are sufficient to finance 7.9 months of retained imports and are equivalent to 1.1 times of short-term external debt,” it added.
RAM said Malaysia’s fiscal position remains a key moderating rating factor, as energy-related earnings will represent a quarter of its initial budgeted revenues for this year.
“Given the recent sharp decline in energy prices, we view the Government’s revision of the 2015 budget in January as timely, and its current fiscal deficit target of 3.2% of GDP as an achievable short-term goal,” it said.
“More importantly, we also draw comfort from the Government’s commitment to a narrower fiscal deficit, through various reductions in operating expenditure items ” as opposed to development expenditure ” in the revised budget,” it said.
While Malaysia’s estimated general government debt level of 53.9% of GDP in 2014, is a concern when compared to that of its peers, RAM said “the level is still manageable” when contrasted against that of most advanced economies such as Japan, the US and many European nations, whose ratios are in excess of 80%.