Malaysia may lose A- Fitch credit rating

SOE debt, declining oil prices and trouble at a sovereign wealth fund have prompted foreign investor outflows and undermined Malaysia’s economic outlook.

Malaysia is going through a rough patch, with its fiscal position weakening due to mounting debt and lower oil prices.

The Southeast Asian nation — currently rated A- by Fitch — has been on negative outlook since July 2013 and the probability of a rating cut over the next 12 to 18 months has risen to over 50%, said the rating agency at its Asia Sovereign Credit Briefing in Hong Kong on March 18.

Fitch expects to conduct a full review of Malaysia's ratings before the end of July 2015.

“Malaysia sits more naturally in the BBB rated category according to many structural credit fundamentals that we look at,” said Andrew Colquhoun, head of Asia Pacific sovereign ratings at Fitch at the conference, adding that the country’s debt-to-GDP ratio has surpassed the average levels seen for peers rated A and BBB.

Federal government debt, for example, stood at 54.7% of GDP by end-2013, breaching the median of 50% for an A rating.

Other sovereigns with a lower credit rating are calling for credit upgrades on the grounds that their outlook is healthier than Malaysia’s.

The finance secretary of BBB- rated Philippines, Cesar Purasima, pointed to his country’s lower credit default spread (CDS) as evidence of a superior fiscal and monetary position versus Malaysia. CDS are insurance-like contracts that protect investors against a loss in holding a sovereign’s debt.

The lower the CDS, the lower the cost is to insure a country’s debt against non-payment for five years. According to Bloomberg data, the Philippines’s five-year CDS level currently stands at 92 while Malaysia’s is at 139, as of March 17.

Moreover, the financial position of 1Malaysia Development Berhad (1MDB), a state-owned investment company, has become a source of uncertainty for the market.

The property-to-energy fund has been in the spotlight over its M$2 billion ($540 million) debt and alleged financial mismanagement. The fund is being advised by a board chaired by the Malaysian prime minister, Najib Razak, who also doubles as the country’s finance minister.

Just last Thursday, 1MDB said it had secured a M$950 million loan on commercial terms from the ministry of finance.

Fitch views 1MDB as a close contingent liability of the sovereign because of the nature of its operations and leadership, as well as explicit sovereign guarantees of some M$5.8 billion ($1.6 billion) of the entity's M$41.9bn debt at end-March 2014. 

“We do take into account 1MDB into the sovereign credit rating,” said Colquhoun, adding that the firm has debt amounting to 4% of Malaysia’s GDP. “We have to keep into context that the debt is a little bit higher since March 2014.”

The steep drop in international oil prices since June 2014, which has seen the price of oil per barrel fall by more than 50%, has further worried bondholders, given Malaysia’s position as a net exporter of petroleum and natural gas products. Petroleum accounts for roughly 30% of fiscal revenues.

This situation has forced Kuala Lumpur to cut its 2015 GDP growth forecast in a budget meeting on January 20 to 4.5% to 5.5%, down from earlier projections of 5% to 6%. The government also raised the nation’s deficit target to 3.2% of GDP from 3%.

MIDF Amanah Investment Bank’s research division (MIDF Research) observed that the net amount offloaded last week exceeded M$1 billion only for the second time this year. It added that last week’s sale increased the cumulative net foreign outflow for 2015 to M$4.57 billion.

The Malaysian ringgit has weakened by 0.5% to M$3.70 against the US dollar on Monday, its weakest level since March 2009, according to Bloomberg data.

“The ability for the sovereign to ride out turbulence in portfolio volatility has diminished,” said Fitch’s Colquhoun, adding foreign reserves as a percentage of short-term debt have declined from 200% in 2009 to 100% end-2014. “That is indeed a concern.”

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