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
