Malaysia Escapes Fitch Downgrade on Improvement in Finances

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Fitch Ratings maintained Malaysia’s credit ranking at the fourth-lowest investment grade after signaling a downgrade earlier this year, saying finances are improving and growth remains steady. Stocks and the ringgit rose.

The outlook on the nation’s A- grade was revised to stable from negative, Fitch said in a statement Tuesday. A new consumption tax and fuel subsidy reforms are supportive of Malaysia’s finances even as federal government debt and explicit guarantees continue to increase, it said.

Concerns Malaysia could be downgraded for the first time since the Asian financial crisis have hurt sentiment in its asset markets with the currency near the weakest in a decade. Fitch had repeatedly warned contingent liabilities such as rising debt at a state investment company were weighing on the rating, contributing to investors souring on the country.

“Malaysia’s rating remains supported by reasonably strong real GDP growth rates and low inflation volatility,” Fitch said. “Fitch views progress on the Goods and Services Tax and fuel subsidy reform as supportive of the fiscal finances. A further narrowing of the deficit is forecast in 2015 despite lower oil prices.”

Malaysian stocks jumped the most in more than two years Wednesday, with the benchmark index climbing as much as 1.8 percent. The currency rose 0.8 percent to 3.7420 against the U.S. dollar as of 10:18 a.m. local time, data compiled by Bloomberg show. It was the worst performer in Asia in the first six months of 2015 and traded close to 3.8 this week, the level at which it was pegged from 1998 until 2005.

Differing Outlooks

Fitch lowered Malaysia’s outlook to negative in 2013, citing weaker prospects for public finances. Moody’s Investors Service and Standard & Poor’s also rank Malaysia at their fourth-lowest investment grades. Moody’s has a positive outlook, while S&P’s is stable.

Andrew Colquhoun, Fitch’s head of Asia Pacific sovereign ratings, warned in March that there was more than a 50 percent chance of a downgrade. The Southeast Asian nation would “sit more naturally in the BBB range,” he said March 18.

The ratings affirmation gives Prime Minister Najib Razak more time to improve the country’s public finances, which have been weighed down by rising debt at state investment company 1Malaysia Development Bhd. and a decline in oil revenue.

1MDB’s borrowings amounted to 41.9 billion ringgit ($11.2 billion) as of March 2014 in part for the purchase of power plants and land. As the company’s troubled finances threatened Malaysia’s rating, Najib faced calls from former premier Mahathir Mohamad to step down as leader because of the performance of 1MDB, whose advisory board he chairs.

Sovereign Support

“Fitch continues to believe that the Malaysian sovereign is incurring additional contingent liabilities beyond explicit guarantees because of quasi-fiscal operations of state-owned entity 1MDB,” it said. “Fitch thinks there is a high probability that sovereign support for 1MDB would be forthcoming if needed.”

The decline in oil prices over the past year and the prospect of higher U.S. interest rates are also adding to pressure on the ringgit. Malaysia is an exporter of crude and derives about 22 percent of government revenue from energy-related sources.

Najib has trimmed expectations for expansion this year as his government cut expenditure amid lower-than-expected income from oil. The economy is forecast to grow 4.5 percent to 5.5 percent in 2015.

While Southeast Asia’s third-largest economy has run a fiscal deficit since 1998, the gap as a percent of gross domestic product has been narrowing. To boost state coffers, Najib scrapped a decades-old fuel subsidy policy in December and started a 6 percent goods and services tax in April.

The prime minister seeks a balanced budget by 2020 from a deficit target of 3.2 percent this year.

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