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Malaysia's Ratings Stable Despite Political Earthquake

The ruling coalition has suffered an upset in elections, but Moody's says the country's rating and outlook will not be affected

Moody's declared yesterday that Malaysia's rating and outlook will not be affected after the current ruling coalition Barisan Nasional, led by Prime Minister Abdullah Badawi, failed to secure the two-thirds parliamentary majority.

"Malaysia's new emergent political dynamic, wherein the position of Barisan Nasional has experienced an erosion, may lead to a policy shift," says Aninda Mitra, a senior analyst with Moody's sovereign risk unit.

The unexpected outcome of the election was due, according to some commentators, to Barisan Nasional's failure to deal with corruption, crime and discontent among minority Chinese and Indian groups.

"However, it is too early to read the post-election policy framework, including how it applies to planned regional infrastructure projects and development zones, or whether the economy will be affected."

A Calyon report released yesterday predicts that although Barisan Nasional has retained its parliamentary majority, the possibility of a loose alliance between the remaining parties may lead to a lengthier decision-making process, as any Barisan Nasional-led legislation will be forcefully challenged in parliament.

The opposition has won five states, four of which will rely on considerable federal government grants which may come under greater scrutiny. However the coalition has announced that it won't block infrastructure projects already approved, continues the Calyon report.

Although political risks have increased, Moody's notes that Malaysia enjoys a relatively strong growth and external payments position as well as a high savings rate and well-developed regulatory and financial institutions. But this has been supported by a pro-cyclical fiscal policy that has maintained key government debt ratios above those of its peers, continues the agency.

But Moody's also states that, in the medium-term, the election results could engender a more competitive political environment and help develop the political system away from the country's ethnic-based system. A shift to market mechanisms for the allocation of resources and public goods could then spur the private sector and reduce the government's role in the economy.

In terms of the impact on spreads, Malaysia's five-year CDS underperformed Korea's by about 4bp immediately after the election. Although it's too early to draw a definitive conclusion, this underperformance against comparable credits could potentially continue if the rise of the opposition begins to have an economic impact, says Calyon.

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