Wednesday, April 13, 2011

Fitch positive on Malaysia's ETP, but public finances a concern

KUALA LUMPUR: Fitch Ratings is positive about the Malaysian government's ambitious Economic Transformation Programme, which could lay the foundations for a breakthrough in economic performance.

Its head of Asia-Pacific Sovereigns Andrew Colquhoun said on Wednesday, April 13 the ETP and could possibly lead to upward pressure on the ratings, though implementation will be key.

"Public finances remain a rating weakness, with faster fiscal consolidation and revenue-strengthening reforms needed to bolster the case for a positive rating action," he said.

Speaking at the agency's annual Credit Briefing in Kuala Lumpur, Colquhoun stated that Malaysia's economic performance has failed to boost Malaysians' average incomes fast enough to avert what Prime Minister Datuk Seri Najib Razak has called the 'middle-income trap'.

However, Fitch Ratings said Malaysia has yet to share in the emerging Asian trend of strengthening sovereign ratings, with its 'A-' long-term foreign-currency issuer default rating (IDR) on stable outlook since November 2004.

Fitch's head of financial institutions for South and Southeast Asia Ambreesh Srivastava major Malaysian banks' standalone financial strength or individual ratings 'are amongst the highest in the emerging markets universe, which reflect their satisfactory financial profiles, as well as the fairly stable operating environment over the years'.

He noted, however, that rating upside for major Malaysian banks is rather limited, particularly in light of global economic uncertainties, and the negative implications from ongoing unrest in the Middle East and North Africa.

"That said, downside risks for Malaysian banks are also limited as most banks are believed to have strong loss absorption ability to negotiate a fresh downturn. This was evident during the 2008/2009 global crisis when most Fitch-rated Malaysian banks' performance turned out to be more resilient than expected," said Srivastava.

The agency has, on balance, a Stable Outlook on Malaysia's banks.

Meanwhile, Malaysia's property and casualty insurance industry is also on Stable Outlook.

Its senior director, insurance Wan Siew Wai noted the outlook was supported by various factors including ongoing premium growth, positive underwriting margins and stable investment yields.

Fitch expects operating surplus generation for the industry to be sustained by underwriting margins and stable investment yields, but notes the same cannot be said for motor insurance.

"The adverse trend of loss development on motor insurance is one of the key risks that could change the Stable Outlook. Another risk is weaker balance sheet if insurers' retained premium expansion significantly outpaces capital generation, given the industry's favourable growth prospects," said Wan.

On the corporates front, its Asia Pacific head of energy & utilities Steve Durose said Petroliam Nasional Bhd (Petronas; Long-Term Foreign-Currency IDR: 'A'/Stable) was facing some challenges as it invests heavily to replace declining domestic production.

This is because development of new production is more expensive given cost inflation and the increased technical difficultly of developing new reserves.

"Fitch believes that the decline in Petronas' margins over the last few years reflects the higher cost of having to buy more crude oil imports.

'Nevertheless, the agency expects Petronas' FY11 financial performance to benefit from currently high crude oil prices, although the agency does not expect any reform of the gas tariff mechanism which requires the company to sell gas to power generators at below international market prices," added Durose.

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