Published on 12 February 2015
The announcement today of Malaysia’s 2014
economic growth rate reinforces RAM Ratings’ assessment of the country’s
sovereign ratings at gA2(pi) and seaAAA(pi) on RAM’s global- and
ASEAN-rating scales, respectively. The economy grew by 6.0%, which was
faster than previously projected (RAM’s forecast: 5.8%). Robust domestic
demand growth had been a key driver of growth despite various cooling
measures. That said, there are short-term challenges to the country’s
economic and fiscal prospects due to the recent increase in global
growth volatility which had coincided with lower energy prices. The
outlook on the ratings is stable in view of Malaysia’s external strength
and ongoing reforms that have gradually improved its fiscal position.
Economic activity is expected to moderate but remain
resilient at 5.3% in 2015, supported by the continued recovery of
exports and private consumption growth of 5.8%. Even after a one-off
price adjustment due to the implementation of the Goods and Services Tax
(GST) in April 2015, inflation is only expected to accelerate to 3.6%
(2014: 3.2%), balanced by lower domestic fuel and energy costs.
Malaysia’s external position is commendable as its
current account surplus remained sizeable at 4.6% of GDP in 2014 –
favourable compared to that of peers. Despite lower fuel prices,
Malaysia’s current account in 2015 – where energy exports will form a
fifth of total export earnings – is projected to remain in surplus (2.5%
of GDP) due mainly to its diversified industrial structure and the
weaker ringgit. In addition, the nation’s external buffers are
sufficient to weather near-term external volatility. Its foreign
reserves, which were valued at USD110.6 billion as at January 2015, are
sufficient to finance 7.9 months of retained imports and are equivalent
to 1.1 times of short-term external debt.
Malaysia’s fiscal position remains a key moderating
rating factor as energy-related earnings will represent a quarter of its
initial budgeted revenues for this year. Given the recent sharp decline
in energy prices, we view the Government’s revision of the 2015 budget
in January as timely and its current fiscal deficit target of 3.2% of
GDP as an achievable short-term goal. More importantly, we also draw
comfort from the Government’s commitment to a narrower fiscal deficit
through various reductions in operating expenditure items – as opposed
to development expenditure – in the revised budget. This is similarly
demonstrated by the fiscal trend in recent years (2009: -6.7% of GDP;
2013: -3.9%) as well as the implementation of various reforms such as
the removal of retail fuel subsidies and the introduction of the GST
which will enhance fiscal sustainability in the long term.
While Malaysia’s estimated general government debt
level of 53.9% of GDP in 2014 is a concern when compared to that of its
peers, the level is still manageable when contrasted against that of
most advanced economies such as Japan, the US and many European nations,
whose ratios are in excess of 80%. However, we project an improvement
in Malaysia’s debt levels – with an improvement of 1.5 to 1.8 percentage
points of the ratio – as the fiscal deficit narrows. While this would
be a welcome development for Malaysia, its sizeable contingent
liabilities (2H 2014: 15.7% of GDP) continue to constrain its ratings.
The country’s sovereign ratings may face downward
pressure if negative externally driven factors cause a significant
deterioration in its economic profile and fiscal position. Conversely,
Malaysia’s sovereign ratings may be revised upwards should there be a
material improvement in its fiscal position. Specifically, our
assessment in this regard would focus on the ability of the Government
to reduce its debt and risks associated with its contingent liabilities,
without significantly affecting economic growth.
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