KUALA LUMPUR: Standard & Poor's Ratings Services has lowered its local currency long-term sovereign rating on Malaysia to 'A' from 'A+', with a stable outlook.
Correspondingly, it lowered the ASEAN scale credit rating on Malaysia to 'axAA+/axA-1' from 'axAAA/axA-1+'.
At the same time, S&P affirmed its 'A-/A-2' foreign currency rating and 'A-1' local currency short-term rating.
In a statement Wednesday, July 27, S&P said it lowered the local currency rating on Malaysia following the implementation of the agency's revised methodology and assumptions for sovereign ratings.
The criteria update did not affect the long-term foreign currency rating on Malaysia, it said.
Under the revised methodology, the gap between the local and foreign currency ratings on most sovereigns we rate worldwide is narrowing, it said.
S&P credit analyst Takahira Ogawa said the gap was narrowing because governments were likely to have fewer incentives to differentiate between their local and foreign currency debt in the event of debt restructuring, given the increasing globalization of markets.
S&P said that in accordance with its criteria for sovereign ratings, the local currency rating on Malaysia was one notch higher than the foreign currency rating, based on the following factors, namely, its active local currency fixed income market, with an annual trading volume equivalent to more than 50% of GDP; and the absence of significant rating constraints related to fiscal flexibility.
It said the sovereign credit rating on Malaysia reflected the country's moderately strong external liquidity position, which continues to underpin its credit standing.
'Malaysia's open, diversified, and competitive economy, with a moderately flexible labor market, relatively developed infrastructure in the region, ample supporting industries, and a high savings rate also support the rating,' it said.
Ogawa said the government's economic policies were generally pragmatic, and it had made efforts to enhance transparency and corporate governance, thereby improving Malaysia's business environment.
'Malaysia's rating constraints are its moderately weak fiscal and debt profile for the rating category. In our view, the slow fiscal consolidation stems from the increasing subsidies, despite the strong 5.2% GDP growth forecast.
"The government has plans to reform the subsidy systems and to introduce goods and service tax. But given the political sensitivity, we expect any implementation to be gradual," said'' Ogawa.
He said an additional rating constraint was Malaysia's moderately weak economic structure, which resulted in continually large government investments--sometimes exceeding that of the private sector's--for more than a decade.
This, in turn, adversely affected the government's fiscal position, he said.
The stable outlook reflects S&P's expectation that, despite Malaysia's still-high fiscal deficit compared with its peers, the government will be able to refinance without a significant increase in interest rates or negative implications for the economy, he said.
"We may raise the sovereign credit rating if stronger growth and the government's effort to lower spending result in lower-than-expected deficits. With lower deficits, a significant reduction in government debt is possible.
"We may lower the rating if the fiscal deficit remains unchanged or increases, resulting in higher net debt in the medium term,' said Ogawa.
''
Correspondingly, it lowered the ASEAN scale credit rating on Malaysia to 'axAA+/axA-1' from 'axAAA/axA-1+'.
At the same time, S&P affirmed its 'A-/A-2' foreign currency rating and 'A-1' local currency short-term rating.
In a statement Wednesday, July 27, S&P said it lowered the local currency rating on Malaysia following the implementation of the agency's revised methodology and assumptions for sovereign ratings.
The criteria update did not affect the long-term foreign currency rating on Malaysia, it said.
Under the revised methodology, the gap between the local and foreign currency ratings on most sovereigns we rate worldwide is narrowing, it said.
S&P credit analyst Takahira Ogawa said the gap was narrowing because governments were likely to have fewer incentives to differentiate between their local and foreign currency debt in the event of debt restructuring, given the increasing globalization of markets.
S&P said that in accordance with its criteria for sovereign ratings, the local currency rating on Malaysia was one notch higher than the foreign currency rating, based on the following factors, namely, its active local currency fixed income market, with an annual trading volume equivalent to more than 50% of GDP; and the absence of significant rating constraints related to fiscal flexibility.
It said the sovereign credit rating on Malaysia reflected the country's moderately strong external liquidity position, which continues to underpin its credit standing.
'Malaysia's open, diversified, and competitive economy, with a moderately flexible labor market, relatively developed infrastructure in the region, ample supporting industries, and a high savings rate also support the rating,' it said.
Ogawa said the government's economic policies were generally pragmatic, and it had made efforts to enhance transparency and corporate governance, thereby improving Malaysia's business environment.
'Malaysia's rating constraints are its moderately weak fiscal and debt profile for the rating category. In our view, the slow fiscal consolidation stems from the increasing subsidies, despite the strong 5.2% GDP growth forecast.
"The government has plans to reform the subsidy systems and to introduce goods and service tax. But given the political sensitivity, we expect any implementation to be gradual," said'' Ogawa.
He said an additional rating constraint was Malaysia's moderately weak economic structure, which resulted in continually large government investments--sometimes exceeding that of the private sector's--for more than a decade.
This, in turn, adversely affected the government's fiscal position, he said.
The stable outlook reflects S&P's expectation that, despite Malaysia's still-high fiscal deficit compared with its peers, the government will be able to refinance without a significant increase in interest rates or negative implications for the economy, he said.
"We may raise the sovereign credit rating if stronger growth and the government's effort to lower spending result in lower-than-expected deficits. With lower deficits, a significant reduction in government debt is possible.
"We may lower the rating if the fiscal deficit remains unchanged or increases, resulting in higher net debt in the medium term,' said Ogawa.
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