RPT-Fitch revises Malaysia's outlook to

negative; affirms IDRs at 'A-'/'A'

Tue Jul 30, 2013 5:04am EDT
By Reuters
(Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has revised Malaysia's Outlook to Negative from Stable. Its Long-Term Foreign and
Local Currency Issuer Default Ratings (IDRs) have been affirmed at 'A-' and 'A', respectively. The
Short-Term Foreign Currency IDR has been affirmed at 'F2' and the Country Ceiling at 'A'.
KEY RATING DRIVERS
The revision of the Outlook to Negative reflects Fitch's assessment that prospects for budgetary
reform and fiscal consolidation to address weaknesses in the public finances have worsened since
the government's weak showing in the May 2013 general elections.
Malaysia's public finances are its key rating weakness. Federal government (FG) debt rose to 53.3%
of GDP at end-2012, up from 51.6% at end-2011 and 39.8% at end-2008. The general government
(GG) budget deficit (Fitch basis) widened to 4.7% of GDP in 2012 from 3.8% in 2011, led by a 19%
rise in spending on public wages in a pre-election year. Fitch believes it will be difficult for the
government to achieve its interim 3% FG deficit target for 2015 without additional consolidation
measures. Fitch sees risks even to the achievement of the agency's 3.5% deficit projection, as this
already factors in 1pp of GDP of spending cuts. This leaves Malaysia's public finances more
exposed to any future negative shock.
Contingent liabilities are rising. FG-guaranteed debt rose to 15.2% of GDP by end-2012 from 9% at
end-2008 as state-owned enterprises (SoEs) participated in a government-led investment
programme. The non-financial public sector deficit soared to 10.2% of GDP in 2012 from 3.5% in
2011. Data on consolidated indebtedness of SoEs are unavailable, which hinders analysis of the
sovereign's contingent liabilities.
Malaysia's fiscal (GG) revenue base is low at 24.7% of GDP, against an 'A' range median of 32.8%.
Fitch has long emphasised two key budgetary vulnerabilities: reliance on petroleum-derived
revenues and the high and rising weight of subsidies in expenditure. Petroleum-derived revenues
contributed 33.7% of federal revenues in 2012, broadly comparable with lower-rated Mexico
(BBB+/Stable), another sovereign with a narrow and oil-dependent fiscal revenue base.
Notwithstanding these weaknesses, Fitch acknowledges strengths in the composition of Malaysia's
debt and in its funding base. FG debt is overwhelmingly denominated in local currency (97% at end-
2012) and has a smooth maturity profile. Sovereign funding conditions benefit from deep domestic
capital markets and from the role of the broader public sector in funnelling savings to the
government. The state-run Employees' Provident Fund held 28.8% of Malaysian government
securities at end-March 2013. The rising role of non-resident investors points to growing exposure to
global investor risk appetite, but Fitch views strengths in Malaysia's external finances as a buffer
against volatility. The impact of heightened market tensions on Malaysia's government debt market
since June has been mild compared with some regional and rated peers, so far.
Malaysia's credit fundamentals are weak by 'A' range standards. Its average income level of
USD10,400 in 2012 was closer to the 'BBB' range median of USD11,300 than the 'A' median of
USD18,600. Its overall level of development and standards of governance are also considered weak
for its 'A-' rating. Fitch's Banking System Indicator of 'bbb' suggests the standalone strength of
Malaysian banks does not weigh on the credit profile. However, Malaysia's high level of private
sector leverage is a risk from a credit perspective. Credit to the private sector reached 118% of GDP
at end-2012, above the 'A' median 94%. Fitch projects the divergence from the 'A' median will widen
out to 2015.
Malaysia's external finances remain its key sovereign credit and rating strength. The economy
recorded a net external creditor position worth 30% of GDP at end-2012 against the 'A' range
median creditor position of 17%. The sovereign's own net foreign asset position of 21.3% of GDP
and net FX creditor position of 44% were stronger than 'A' medians of 16.8% and 14.4% respectively.
This is despite a decline in the current account surplus to a projected 3% of GDP in 2013 from
double digits each year from 2003 to 2011 amid rising investment and a drop in the savings rate, led
by the public sector.
Malaysia's five-year average GDP growth rate of 4.3% (2009-2013) compares favourably with the 'A'
median of 2.6% and the 'BBB' median of 2.7%. However, growth is being boosted by the
government's investment programme. Real gross domestic fixed capital formation (GFCF) grew 19.9%
in 2012 against a five-year average of 5.6%pa over 2007-2011. GFCF contributed +4.4 percentage
points to 2012's 5.6% GDP growth.

RATING SENSITIVITIES
The Negative Outlook reflects the following risk factors that may, individually or collectively, result in
a downgrade of the ratings, most likely by one notch:
- Fiscal slippage relative to the government's targets and lack of progress on structural budgetary
reform; further accumulation of contingent or other off-balance-sheet liabilities
- Further erosion of the current account surplus, particularly a "twin deficit" situation where failure
to consolidate the budget is associated with the emergence of a sustained current account deficit
- A shock to interest rates or to employment sufficient to impair household debt servicing ability
and put pressure on the banking system
- Significantly slower GDP growth than Fitch's current projection of about 5% per year out to 2015
Given the Negative Outlook, Fitch's sensitivity analysis does not currently anticipate developments
with a material likelihood, individually or collectively, of leading to a rating upgrade. However, future
developments that may, individually or collectively, lead to the Outlook being revised to Stable
include:
- Faster progress on fiscal consolidation and budgetary reform than Fitch expects

KEY ASSUMPTIONS
- The ratings assume a global economic recovery in line with the agency's June Global Economic
Outlook. In particular, the ratings assume China avoids a slowdown to low single digit growth
- The ratings assume oil prices do not diverge significantly from the agency's base-case projection
of USD100/barrel on average over 2014-2015
- The ratings assume Malaysia continues to experience broad social and political stability