By Dr Mohd Afzanizam Abdul Rashid, Chief Economist, Bank Islam Malaysia Berhad
It was a devastating news when Fitch Rating downgraded Malaysia’s sovereign rating by a notch to BBB+ in early December. Fitch Rating was of the view that the depth and duration of the Covid-19 crisis have weakened several of Malaysia’s key credit rating namely the fiscal position. This was quite apparent judging from the size of fiscal stimulus totaling RM305 billion compared to RM67 billion when the country faced the 2009 recession.
To some degree, the decision was not entirely surprising given that the rating outlook has already been revised downward to negative in April this year. And perhaps, the S&P Global Ratings could also follow the same footsteps given the negative outlook accorded to the Malaysian government during June.
Understandably, there were flaks lambasted towards the Credit Rating Agencies (CRAs). Granted that such criticism does carry some weight especially when one revisited the US Sub Prime Crisis in 2007 and 2008.
During those periods, the toxic assets which were predominantly mortgages extended to clients whose credit standards are subprime, repackaged into Asset Backed Securities, were rated higher and the investors were oblivious on associated risk to the assets.
The crisis has led the financial system almost collapsing and the US Federal Reserve has to come in to provide the backstop through various intervention programs. The unconventional monetary policies chiefly the Quantitative Easing (QE) measures were adopted by the major central banks.
While criticizing the CRAs can be quite convenient, we would need to have a clear view on the purpose of credit ratings. Essentially, the CRAs are merely issuing their credit opinion based on the certain parameters and methodology.
In the case of sovereign rating, the common parameters would be the fiscal position which essentially how the government governs its tax policy and expenditure and it is typically carries a huge weight in their rating assessments.
There are also other measures that they look at such as the volatility of GDP per capita, balance of payment and qualitative aspects such as governance and politics. The whole exercise is to prove a point of the ability of the government to repay its debt obligation. This information will be highly valuable to the fixed income investors who invested in the government papers in particular the foreign investors.
The next question then, should the government formulate its policies based on CRAs reaction? Maybe not entirely. The government should decide what is best for the country and the policy makers along with the government machinery would have a better feel on the state of the domestic economy. In that sense, the government should be unperturbed on any decision made by the CRA.
Notwithstanding that, the signals from the CRAs and the financial markets should not be totally discarded. Given that CRAs are interested in the government’s credit worthiness, perhaps it is good to ensure that the government is always deemed to be as a good paymaster.
This would mean that at some point in the future, the government may want to introduce measures which are not popular. At the moment, there seems to be discussion on the Goods and Services Tax (GST) on whether such tax could be resurrected after it was repeal in 2018.
And inadvertently, talks of subsidy rationalization could resurfaced again as the government may need to reprioritize its spending plans. Be that as it may, the government is only one part of the growth equation. There are other elements in the economy namely the households, businesses, the external sector and the markets which will be interacting with each other in order to produce the goods and services.
The government is merely an enabler. They will create the platforms and opportunity so that the private sectors would be able to grow on its own. Capacity building such as the education, healthcare and infrastructure are key things for households to elevate themselves and become a productive player in the economy.
Similarly, the businesses would need certain incentives so that they become vibrant, profitable and be able to create high quality jobs to the citizens. As in typical economic problems, its all about managing the limited resources in order to produce the best results. Of course, these are more like a pre amble.
The reality is that each country’s economic problems are more complex and in the case of Malaysia, our history, pre and post-independence, would requires careful analysis and delicate balance when prescribing the right policies. More importantly, is the trust towards the institution and the outcome from implementing the policies. Therefore, the result has to be tangible and communication to the public is one of the critical success factor.