Fitch Sees More Than 50% Odds of Malaysia Downgrade on 1MDB

Malaysia’s credit rating is “more than 50 percent likely” to be downgraded as its trade balance worsens and a state investment company struggles to meets its debt obligations, Fitch Ratings said.

The Southeast Asian nation would “sit more naturally in the BBB range,” Andrew Colquhoun, head of Asia Pacific sovereign ratings, said in an interview in Singapore Wednesday. Malaysia is rated A- by Fitch, one level above the lowest three bands of the investment grade ranging from BBB+ to BBB-. The ringgit erased gains.

A deteriorating current-account surplus exposes Malaysia to volatility in investor sentiment, and Fitch will review the country next quarter, Colquhoun said. Developments surrounding 1Malaysia Development Bhd., whose advisory board is headed by Prime Minister Najib Razak, and which has been forced to dismantle its assets amid surging debts, is a “country demonstration of what weaker governance means,” he said.

The ringgit fell 0.2 percent to 3.7027 a dollar as of 3:03 p.m. Wednesday in Kuala Lumpur, data compiled by Bloomberg show. The currency earlier rose as much as 0.24 percent. One-month non-deliverable forwards fell 0.3 percent to 3.7154 after climbing as high as 3.6984.

“The Fitch comments saw the ringgit giving up its gains,” said Khoon Goh, a Singapore-based strategist at Australia and New Zealand Banking Group Ltd. “There is a risk of a rating cut, but it’s hard to say whether this has been priced in or not.”

Negative Outlook

Fitch assigned a negative outlook to Malaysia’s rating in July 2013, and affirmed the stance a year later, as the excess in the nation’s broadest measure of trade narrowed amid a surge in imports following Najib’s $444 billion push to boost infrastructure in this decade. The current-account surplus shrank to 6.1 billion ringgit ($1.6 billion) in the fourth quarter, the least since June 2013. Exports contracted in January for only the second time since 2013.

Plunging crude prices prompted the government to raise this year’s fiscal-deficit target and cut the economic growth forecast as a drop in earnings hurts Asia’s only major oil exporter.

While Moody’s Investors Service and Standard & Poor’s also rank Malaysia at their fourth-lowest investment grades, their stances differ from Fitch.

Moody’s, S&P

Moody’s affirmed its A3 rating and positive outlook in January, and said in a March 5 report its decision is backed by Malaysia’s macroeconomic stability and the government’s policy of reducing its fiscal deficit. S&P in February maintained its A- rank and stable view, and said the economy can withstand some weakness in the energy sector arising from lower oil prices.

The existence of entities like 1MDB and the rise in the amount of debt of state-owned entities that’s guaranteed by the government “discount the support that we give to the credit from the consolidation of public finances,” Colquhoun from Fitch said. “The current-account surplus is narrowing. It may well tip into a deficit this year depending on how the decline in oil prices feeds through.”

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