KUALA LUMPUR – The revision of Malaysia’s rating by Fitch Ratings is largely due to lingering political uncertainty following the change in government last March, prospects for further improvement in governance standards and the negative impact of the Covid-19 pandemic on the country’s fiscal position, Finance Minister Datuk Seri Tengku Zafrul Tengku Abdul Aziz said.
He expressed the government’s disappointment with the rating outcome, particularly in light of the current exceptional circumstances as the Covid-19 pandemic is still unfolding.
He said Malaysia has already started to see the green shoots of economic recovery, attributed to the various stimulus packages implemented by the government since March.
“By honing in on Malaysia’s fiscal position and political situation, Fitch’s decision does not give due justice and credit to our crisis response efforts and our strong economic fundamentals,” he said in a statement.
Fitch today said it has downgraded Malaysia’s sovereign rating from ‘A-’ to ‘BBB+’, with an improved outlook from negative to stable.
According to Tengku Zafrul, credit rating agencies have taken over 220 negative rating actions since early March, with more than 100 sovereign downgrades as policymakers take urgent and vital measures to protect lives and livelihoods.
Governments globally have committed US$11.7 trillion (RM47.5 trillion) in economic stimulus packages, leading to an increase in fiscal deficits by an average of nine% of gross domestic product (GDP), with global public debt projected to approach 100% of GDP by end 2020, he said.
Back home, he said sound economic fundamentals and decisive fiscal measures have enabled Malaysia to respond swiftly, effectively and strategically to the challenging environment, whilst maintaining economic growth and resilience for the future.
The government has responded swiftly and consistently in addressing the COVID-19 crisis with four stimulus packages worth RM305 billion or US$75 billion about 20% of GDP to help people and businesses.
“These packages are expected to contribute over four percentage points to GDP growth in 2020.
“The targeted and temporary nature of the stimulus measures have helped limit the impact on the fiscal deficit,” he said.
He said the government had also halved its fiscal deficit from 6.7% of GDP in 2009 to 3.4% in 2019, and is still expected to remain amongst the lowest within the A category in 2020.
Tengku Zafrul said Malaysia is set for a sharp recovery path in 2021 driven by the stimulus packages implemented this year, while Budget 2021 which is expected to contribute to the 6.5% to 7.5% projected growth next year.
Malaysia’s credit standing is also supported by its robust external position, underpinned by 22 years of consistent current account surplus and substantial external assets held by banks and corporates.
“In terms of liquidity, we are supported by deep and well-diversified capital markets.. Malaysian banks are now significantly more resilient to shocks compared to previous crises,” he said.
Meanwhile, Tengku Zafrul said the government takes note of Fitch’s concern regarding the domestic political situation.
“Yet, it is worth noting that key legislations have been passed in relation with the financing of Covid-19 measures, as well as for the protection of affected businesses and individuals until 2022.
“Budget 2021 was also recently passed at the policy stage on the back of continuous government engagement with numerous stakeholders,” he said.
In its report earlier today, Fitch acknowledged that the authorities responded swiftly to the crisis, with material relief measures for affected individuals and businesses.
“The government has secured passage of core legislation to implement relief measures, including the 2021 budget,” it said.
The rating agency said measures to contain the domestic spread of the coronavirus, combined with weak investment and low tourism receipts due to the pandemic, have reduced economic activity, as it has in many countries globally.
Fitch expects the Gross Domestic Product (GDP) to contract by 6.1% in 2020 before rebounding by 6.7% in 2021 due to base effects, a revival of infrastructure projects and an ongoing recovery of exports of manufactured goods and commodities.
“These forecasts remain subject to uncertainty and depend on the near-term evolution of the pandemic, as illustrated by an increase in the number of daily cases since early-October,” it said.
It noted that the government expects to vaccinate 30% of the population next year, based on agreements so far with vaccine producers.
“We forecast growth of 4.6% in 2022, on expectation that Malaysia's diversified economy will deliver strong medium-term growth,” the agency said.
Fitch expects the fiscal deficit to remain higher than pre-pandemic levels, given a continuation of support measures and political pressure for higher spending.
Budget 2021 targets a deficit of 5.4% of GDP, from an estimated 6% in 2020, and an average deficit of 4.5% of GDP from 2021 through 2023.
According to Fitch, the targets are achievable.
“We expect government revenue to remain low at 19.1% of GDP in 2020 ('BBB' median: 31.4%) and dependent on oil production, which the government expects to generate 22% of total revenue this year, including a special dividend from national oil company Petroliam Nasional Bhd (Petronas).
“The low and concentrated revenue base – exacerbated by the removal of the GST in 2018 – has in recent years led the government to draw on dividends of government-linked companies, pending the introduction of new and more sustainable sources of revenue, which Fitch understands are being considered for the medium term,” it said.
Fitch expects general government debt to jump to 76% of GDP in 2020 from 65.2% of GDP in 2019. The debt figures used by Fitch include officially reported "committed government guarantees" on loans, which are serviced by the government budget, and 1Malaysia Development Bhd’s (1MDB) net debt, equivalent in September 2020 to 12.6% and 1.3% of GDP, respectively. – Bernama, December 4, 2020
.JPG)
