Fitch Affirms Malaysia at ‘BBB+’; Outlook Stable

Fitch Ratings has affirmed Malaysia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB+’ with a Stable Outlook.

It said that among the key rating drivers  were strong growth outlook, reopening supports robust recovery, rise in fiscal deficit and gradual deficit reduction

Fitch said that Malaysia’s ratings balance prospects of strong and broad-based medium-term growth with a diversified export base, against high public debt and lingering political uncertainty

It said that it expects GDP growth of 6.2% in 2022 and 5.1% in 2023, as services should gain from pent-up demand alongside reopening of the economy, made possible by full vaccination of 80% of the population.

It said that manufacturing continues to benefit from global demand for Malaysia’s export products, including electronics, crude oil, and personal protective equipment. The government has revived public investment previously delayed due to the Covid-19 pandemic.

Fitch said that central government fiscal deficit rose to 6.4% of GDP in 2021 from 6.2% in 2020 due to higher pandemic-relief spending and lower revenue. As a result, general government debt to GDP rose to 77.7% by end-2021 (BBB median: 60.3%) from 65.2% in 2019. Our debt figures include “committed guarantees” on loans by government-linked companies (GLCs) and 1Malaysia Development Berhad’s net debt, which are worth a combined 14.2% of GDP and serviced by the government budget.

It said that general government deficit to fall marginally to 5.0% in 2022, reflecting withdrawal of Covid-19-related stimulus and a slight increase in revenue from new tax measures and rebounding economic activity

We forecast a gradual reduction in general government deficits over the next few years, with the deficit averaging 4.7% of GDP in 2022-2023, as resumed growth lifts revenue and economic relief measures expire. We expect the government debt ratio to decline to 75.1% of GDP in 2023.

On government revenue, Fitch said that the general government revenue ratio remains low and declined to a Fitch-estimated 18.3% of GDP in 2021 from 22.2% in 2015. This was exacerbated by the replacement of the goods and services tax with the narrower sales and services tax in 2018. Hence, the government remains relatively dependent on revenue from oil production, amounting to 18.4% of total revenue in 2021, including dividends from the state oil company Petroleum Nasional Berhad (PETRONAS) (BBB+/Stable). General government debt as a share of revenue is high at a Fitch-estimated 424.1% for 2021 (BBB median: 252.4%). Large payrolls and pension spending (7.4% of GDP in 2021), as well as subsidies, further constrain budgetary flexibility.

Fitch all assumes the near-term political stability will be underpinned by the memorandum of understanding between the government and the opposition that lasts until 31 July 2022. Elections are due by July 2023 and lingering political uncertainty weighs on the policy outlook and on prospects for an improvement in governance standards, in our view.

On Current Account Surpluses, Fitch said that the current account surplus in 2021 narrowed to 3.5% of GDP from 4.3% in 2020, as both exports and imports saw double-digit growth.

It said that it expects Malaysia to continue to run solid current account surpluses over the medium term. The low share of foreign-currency-denominated debt at around 3% of total debt also supports Malaysia’s external finances.

On inflation, it said that it expects inflation to stabilise at around 2.5% in 2022, as domestic inflationary pressures are likely to remain limited. Hence, we expect Bank Negara Malaysia to start its tightening cycle in 2022 with one 25bp rate increase, followed by two hikes in 2023.

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