S&P revises Malaysia Outlook to Negative; 'A-/A-2' Foreign Currency, 'A/A-1' Local Currency Ratings affirmed

June 26, 2020

KUALA LUMPUR -- The economic impact of the COVID-19 pandemic, combined with depressed oil prices and fiscal stimulus, will weaken the Malaysian Government's debt position for the next few years, according to Standard & Poor's, which is revising its outlook on Malaysia to negative. This reflects additional downside risk to the Government's fiscal metrics, owing to the weak global economic climate and heightened policy uncertainty, S&P says.

"We are affirming our 'A-' long-term and 'A-2' short-term foreign currency sovereign credit ratings on Malaysia. We are also affirming our 'A' long-term and 'A-1' short-term local currency ratings, S&P says.

"Our ratings on Malaysia balance the country's strong external position, monetary policy flexibility, and track record of supporting sustainable economic growth, against its elevated Government debt stock, and evolving fiscal policy settings".

S&P says its ratings could face downward pressure if economic growth suffers a deeper or more prolonged downturn than it currently expects, or if we see a weaker commitment to fiscal consolidation, either of which could result in the faster accumulation of net general Government debt.

Downward ratings pressure would arise if Malaysia's annual change in net general Government debt surpassed 4% on a sustained basis, or interest paid by the general Government exceeded 15% of revenue.

Downward ratings pressure could also build if political stability deteriorated such that policymaking became materially less predictable.

S&P says it may revise the outlook to stable over the next 24 months if the economy grows considerably faster than it forecasts, and, in turn, produces a stronger fiscal performance than expected, leading to a quicker improvement in Government finances.

"Higher fiscal deficits this year and next, alongside a forecast contraction in real GDP this year, will likely lead to the Malaysian Government's net indebtedness surpassing 60% of GDP," S&P says.

"Against an unforgiving global macro-economic backdrop, heightened domestic political uncertainty is adding downside risks to the Government's fiscal position.

"We weigh these risks against Malaysia's strong external position, sound long-term growth prospects, and well-established monetary policy credibility."

S&P is forecasting a 2% contraction in the Malaysian economy in 2020, reflecting the deep effects of the COVID-19 pandemic.

"The economy will likely begin to stabilise thereafter, and we forecast a strong recovery to 7.5% growth in 2021," it says, but adds that

Malaysia faces heightened political uncertainty owing to marginal support for the ruling Perikatan Nasional coalition in Parliament.

S&P is projecting Malaysia's GDP per capita to be about US$10,400 by end-2020, lower than most peers' in the same rating category but notably higher than most of its Southeast Asian peers, except Singapore and Brunei.

"We forecast Malaysia's real GDP per capita growth to average approximately 2.8% per year over 2020-2023."

www.standardandpoors.com (ATI).