Moody's Cuts Malaysia Credit-Rating Outlook on Weaker Finances

  • Malaysia escaped Fitch credit rating downgrade in June
  • Government cut subsidies, implemented new tax to boost revenue

Moody’s Investors Service lowered its credit-rating outlook for Malaysia, citing an external environment that has crimped government revenue despite Prime Minister Najib Razak’s efforts to improve the country’s finances.

The ratings company cut the outlook on the A3 sovereign rating to stable from positive, it said on Monday in a statement. The move brings its outlook into line with that of Standard & Poor’s and Fitch Ratings, with all three companies ranking Malaysia at their fourth-lowest investment grades.

Since Moody’s assigned a positive outlook in November 2013 the government has sought to improve its finances, rationalizing fuel subsidies and putting in place a goods and services tax, the ratings company said. But the impact on the government’s balance sheet has been limited and will remain so, in part due to changes in the external environment, it said.

"Those environmental changes have also undermined Malaysia’s external position, with large capital outflows, a falling current account surplus, sharp exchange rate depreciation and falling reserves," Moody’s said.

The ringgit, which was already weaker prior to the Moody’s announcement amid general risk aversion related to China, was 0.6 percent lower at 4.4120 a dollar as of 2:05 p.m. in Kuala Lumpur. The yield on the 10-year government bond was up three basis points to 4.25 percent.

Investors Flee

The outlook cut from Moody’s comes about six months after Malaysia avoided a credit rating downgrade from Fitch. The ringgit slumped about 19 percent in 2015 -- falling to a 17-year low -- as international investors unloaded Malaysian equities amid domestic political turmoil, falling oil prices and a selloff in emerging-market assets.

"It was always difficult for Moody’s to maintain the outlook at positive let alone think about an upgrade given the current environment of low commodity prices and the weak external backdrop," said Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore. "The fact that they’ve kept it at stable is likely in recognition of the fact that there are actual fiscal reforms that are happening."

Najib came under pressure last year after a multi million-dollar funding scandal surrounding him came to light and investors grew wary of risks posed by state investment company 1Malaysia Development Bhd. Both the premier and 1MDB have consistently denied any wrongdoing.