Malaysia Stocks Fall Most in 7 Weeks, Ringgit Drops on Fitch Cut

Malaysian stocks fell the most in almost seven weeks, the ringgit slumped and bonds extended losses after Fitch Ratings cut the nation’s credit outlook, citing rising debt levels and a lack of budgetary reform.

The FTSE Bursa Malaysia KLCI Index sank 1.3 percent to 1,772.62 at the 5 p.m. close in Kuala Lumpur, the steepest loss since June 13. The currency dropped to a three-year low and 10-year bond yields climbed to the highest since January 2011.

Fitch reduced its credit outlook on Malaysia to negative from stable, saying in a statement yesterday that Malaysia’s public finances are its “key rating weakness.” The shrinking current-account surplus and $2.9 billion of sovereign debt maturing today raises the risk of capital outflows, putting the ringgit on course for its worst month in more than a year.

“The warning has been given to Malaysia that most likely they will cut the rating if the government is not doing much,” said Ang Kok Heng, who helps manage $428 million as chief investment officer at Phillip Capital Management Sdn. in Kuala Lumpur. “For some foreign investors who are thinking whether to get out of Malaysia, this is a trigger, an excuse for them to get out.”

Malaysia is committed to continue its fiscal reform plan, including rationalizing subsidies and broadening the tax base, the government said in an e-mailed statement today. The economy is “fundamentally healthy” with “strong” growth and foreign currency reserves, it said.

Index Valuations

The KLCI index,, which reached a record on July 24, slid for a fifth day, dragging valuations to the lowest level in a month. UEM Sunrise Bhd., Malaysia’s largest property developer by market value, dropped 6.3 percent, the biggest loss in the gauge. The ringgit depreciated 0.6 percent to 3.2440 per dollar in Kuala Lumpur, the weakest level since July 2010, according to data compiled to Bloomberg.

A downgrade on Malaysia’s credit rating is “more likely than not” over the next 18 to 24 months, Andrew Colquhoun, head of Asia-Pacific sovereigns at Fitch, said in a conference call today. The ratings company also lowered today the outlook on Petroliam Nasional Bhd. and Malayan Banking Bhd. to negative from stable following the revision for sovereign rating.

“The central issue for us is the public finances,” Colquhoun said. “The government’s relatively weak showing in the May election has diminished their political capital and ability to press forward with both fiscal consolidation, or with structural budgetary reforms.”

Bond Yields

The yield on 3.48 percent government notes due March 2023 rose four basis points to 4.14 percent, the highest for a benchmark 10-year note since January 2011 and adding to an 18 basis-point increase yesterday. The two-year onshore interest-rate swap climbed three basis points to 3.37 percent.

“The dynamics of Malaysia’s current-account surplus getting narrower and the fiscal deficit getting wider are negative for the ringgit,” said Nizam Idris, head of fixed income and currency strategy at Macquarie Bank Ltd. in Singapore. “The shorter-term issue is the bond repayment, which the market has been worried about.”

Fitch affirmed Malaysia’s long-term foreign currency-denominated rating at A-, the fourth-lowest investment grade. It will be difficult for the government to meet a 3 percent deficit target in 2015 without more consolidation, the company said in the statement.

Public Debt

Malaysia’s debt to gross domestic product ratio of 53.5 percent is higher than 25 percent in Indonesia, 51 percent in the Philippines and 43 percent in Thailand, data compiled by Bloomberg show. It’s also approaching the government’s 55 percent limit. The budget deficit widened to 4.7 percent of GDP in 2012 from 3.8 percent in 2011, led by a 19 percent rise in spending on public wages ahead of the May election, Fitch said.

Pressure on the ringgit will remain until the external outlook improves and Bank Negara Malaysia will probably defend the ringgit’s 3.25 per dollar level, according to a DBS Group Holdings Ltd. research note today. The current-account surplus will narrow to 6 percent in 2013 from 6.1 percent last year and 12 percent in 2011, a Bloomberg survey of economists shows.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose 51 basis points, or 0.51 percentage point to a one-month high of 9.05 percent.

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