Malaysia 'A-/A-2' Foreign Currency And 'A/A-1' Local Currency Ratings Affirmed; Outlook Stable

  • We expect that Malaysia's core credit strengths, including its robust external position and highly credible monetary policy settings, will continue to support the rating following the recent aggressive decline in oil prices and unexpected change in government.
  • Although we forecast a higher fiscal deficit this year owing to stimulus measures and lower oil-related revenues, we expect the government to maintain its fiscal consolidation trajectory over the medium term.
  • We are therefore affirming our 'A-/A-2' foreign currency and 'A/A-1' local currency ratings on Malaysia.
  • The outlook on the ratings remains stable.

Rating Action

On March 26, 2020, S&P Global Ratings affirmed its 'A-' long-term and 'A-2' short-term foreign currency sovereign credit ratings on Malaysia. At the same time, we affirmed our 'A' long-term and 'A-1' short-term local currency sovereign credit ratings on Malaysia. The outlook on the long-term ratings remains stable.

Outlook

The stable outlook reflects our expectation that Malaysia's strong external position, monetary flexibility, and well-established institutions will remain in place over the next two years.
Upside scenario
We may raise the sovereign credit ratings over the next 24 months if the economy expands considerably faster than our forecast, and in turn produces a fiscal performance that's better than we expected, reducing debt further than anticipated.
Downside scenario
On the other hand, our ratings on Malaysia could face downward pressure if economic growth suffers a deeper or more prolonged downturn than we currently expect, or if we assess a weaker commitment to fiscal consolidation, either of which could in turn hurt the government's debt standing. Indications of downward pressure on the ratings would be net general government debt surpassing 60% and the annual change in net general government debt surpassing 4%, in a sustained way, or interest paid by the general government exceeding 15% of revenue. Downward pressure on the ratings could also emerge if we perceive that political stability has deteriorated such that policy-making has become materially less predictable.

Rationale

We affirmed the ratings on Malaysia to reflect our expectations that the country's new government will not deviate materially from its long-term fiscal consolidation path, despite the recent collapse in oil prices, along with substantial downside pressure on real GDP growth owing to the COVID-19 pandemic. We have revised our general government deficit forecast to 4.1% of GDP in 2020, versus our previous expectation of a 3.2% deficit. Somewhat lower oil-related revenue and greater expenditure on stimulus measures will contribute in roughly equal measure to the higher deficit. Nevertheless, we maintain our forecast of a gradual decline in net general government debt through 2023. We forecast net general government debt will average 58.5% from 2020-2023, with the annual change in net general government debt averaging 2.9%.
The Malaysian government derives slightly less than 20% of its total revenue from oil-related sources. The single largest component of this revenue is the dividend paid to the government by state oil company PETRONAS, which we expect to be maintained at Malaysian ringgit (MYR) 24 billion, as allocated in the government's original 2020 budget. This dampens the potential downward effect on revenue, despite oil prices having fallen dramatically below the budget's initial assumption of $62 per barrel.
Prior to the formation of Malaysia's new government in early March, then-interim Prime Minister Mahathir Mohamed introduced a fiscal stimulus package that we expect to add approximately 0.2% of GDP to the fiscal deficit in 2020. In anticipation of a deceleration of real GDP growth to 2.7% this year, as well as likely additional measures aimed at supporting the economy, we envisage additional downside pressure on fiscal settings this year. At this time, we do not believe that the cumulative effect on the government's fiscal settings is likely to persist beyond 2020. However, if we perceive that Malaysia's new government is more likely to deviate from a path of fiscal consolidation over the next three-to-four years, or that the effects of weaker global commodity markets and economic activity will persist well beyond this year, then additional downward pressure on the ratings could emerge.

Key Statistics

Table 1

Malaysia - Selected Indicators
Economic indicators (%)2014201520162017201820192020202120222023
Nominal GDP (bil. LC)1,1241,1771,2501,3721,4471,5111,5591,6681,7691,878
Nominal GDP (bil. $)343301301319359365368391419447
GDP per capita (000s $)11.29.79.510.011.111.211.111.712.413.1
Real GDP growth6.05.14.45.74.74.32.76.14.64.5
Real GDP per capita growth4.33.53.04.53.63.71.44.83.33.3
Real investment growth4.73.62.66.11.4(2.1)2.45.54.24.3
Investment/GDP25.325.426.025.623.620.920.820.820.620.6
Savings/GDP29.628.428.428.425.724.222.622.722.722.7
Exports/GDP72.669.466.870.068.865.363.663.062.662.6
Real exports growth5.00.31.38.72.2(1.1)0.15.24.44.7
Unemployment rate2.93.23.53.43.33.33.53.53.33.3
External indicators (%)
Current account balance/GDP4.33.02.42.82.13.31.71.92.12.2
Current account balance/CARs5.54.03.33.72.94.72.62.83.23.3
CARs/GDP78.274.671.975.273.570.567.166.866.366.1
Trade balance/GDP10.19.38.28.58.28.38.08.08.18.0
Net FDI/GDP(1.6)(0.2)1.11.20.80.60.30.30.30.3
Net portfolio equity inflow/GDP(3.5)(2.2)(1.1)(1.1)(3.1)(2.5)(0.3)(0.3)(0.3)(0.3)
Gross external financing needs/CARs plus usable reserves85.986.394.295.094.995.796.596.294.994.1
Narrow net external debt/CARs14.421.128.925.525.328.728.225.523.221.1
Narrow net external debt/CAPs15.221.929.926.526.130.129.026.324.021.8
Net external liabilities/CARs0.3(17.0)(5.8)28.017.319.819.115.511.98.4
Net external liabilities/CAPs0.3(17.8)(6.0)29.117.820.819.616.012.28.7
Short-term external debt by remaining maturity/CARs34.534.836.432.832.235.536.034.833.031.3
Usable reserves/CAPs (months)6.46.45.14.54.54.64.74.64.64.5
Usable reserves (mil. $)115,95189,28986,09995,45494,45494,62397,406102,314106,508110,979
Fiscal indicators (general government; %)
Balance/GDP(3.0)(2.9)(3.0)(2.9)(3.9)(3.3)(4.1)(3.0)(2.8)(2.8)
Change in net debt/GDP3.54.21.512.01.76.43.82.72.52.5
Primary balance/GDP(1.0)(0.9)(0.9)(0.3)(1.3)(0.8)(1.5)(0.5)(0.4)(0.4)
Revenue/GDP22.321.319.418.418.520.117.817.817.817.8
Expenditures/GDP25.324.222.421.322.423.421.920.820.620.6
Interest/revenues9.09.710.914.014.012.614.614.113.713.4
Debt/GDP52.053.752.059.860.564.566.364.763.562.4
Debt/revenues233.5251.9267.8324.4327.6321.2372.5363.5356.8350.3
Net debt/GDP46.548.647.355.154.058.160.158.958.057.2
Liquid assets/GDP5.45.14.74.76.66.46.25.85.55.2
Monetary indicators (%)
CPI growth3.12.12.13.90.90.71.11.61.72.0
GDP deflator growth2.5(0.4)1.73.80.70.10.50.81.41.6
Exchange rate, year-end (LC/$)3.504.294.494.064.144.094.304.254.204.20
Banks' claims on resident non-gov't sector growth8.88.25.85.68.74.96.56.56.56.5
Banks' claims on resident non-gov't sector/GDP128.5132.8132.4127.3131.2131.7135.9135.4135.9136.3
Foreign currency share of claims by banks on residents2.23.03.22.42.42.43.03.03.03.0
Foreign currency share of residents' bank deposits5.78.68.27.37.47.77.07.07.07.0
Real effective exchange rate growth(1.1)(8.5)(3.4)(1.6)4.1(1.5)N/AN/AN/AN/A
Sources:Bank Negara Malaysia (economic; monetary; debt and external indicators), Bank Negara Malaysia; Ministry of Finance Malaysia (fiscal indicators).
Adjustments: We include 'committed government guarantees' (including related with 1MDB) in our general government gross debt.
Definitions: Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. N/A--Not applicable. LC--Local currency. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. e--Estimate. f--Forecast. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Ratings Score Snapshot

Table 2


Malaysia - Ratings Score Snapshot
Key rating factorsScoreExplanation
Institutional assessment3Generally effective policy-making promoting sustainable public finances and balanced economic growth; evolving checks and balances. The smooth transition of power between two governments in 2018 reaffirms strong instututions. However, succession risk is now in play.
Economic assessment4Based on GDP per capita (US$) and growth trends as per Selected Indicators in table 1.
External assessment2The Malaysian ringgit (MYR) is neither a reserve nor actively traded currency. Based on narrow net external debt and gross external financing needs/(current account receipts + useable reserves) as per Selected Indicators in table 1.
Fiscal assessment: flexibility and performance3Based on the change in net general government debt (% of GDP) as per Selected Indicators in table 1
Fiscal assessment: debt burden4Based on net general government debt (% of GDP) and general government interest expenditures (% of general government revenue) as per Selected Indicators in table 1
Monetary assessment2The central bank (BNM) has a track record of independence and uses a wide range of market-based monetary instruments, such as consumer price index as per Selected Indicators in table 1. The central bank has the ability to act as lender of last resort for the financial system and has clear monetary policy objectives. Depository corporation claims on residents in local currency and nonsovereign local currency bond market capitalization combined amount to more than 150% of GDP.
Indicative ratinga-As per table 1 of "Sovereign Rating Methodology."
Notches of supplemental adjustments and flexibility0
Final rating
Foreign currencyA-
Notches of uplift1Default risks apply differently to foreign- and local-currency debt. The sovereign has an independent monetary policy with a track record of a floating exchange rate. Malaysia's capital markets are among the deepest in the region. Fiscal and institutional constraints are not a dominant constraint to the rating compared with the other assessments.
Local currencyA
S&P Global Ratings' analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). S&P Global Ratings' "Sovereign Rating Methodology," published on Dec. 18, 2017, details how we derive and combine the scores and then derive the sovereign foreign currency rating. In accordance with S&P Global Ratings' sovereign ratings methodology, a change in score does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the scores. In determining the final rating the committee can make use of the flexibility afforded by §15 and §§126-128 of the rating methodology.
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