Published September 2, 2008
Malaysia's ratings still safe despite expansionary budget

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(HONG KONG) Malaysia's expansionary budget and widening fiscal deficit are beginning to worry global rating agencies but analysts do not expect a sovereign rating downgrade because of the country's strong external position.
'This budget was disappointing and ties in with the deterioration we are seeing on the fiscal front. The expansionary budget reverses 4 years of fiscal consolidation.'
- Ai Ling Ngiam,
Fitch Ratings sovereign analyst

The 2009 budget plan, unveiled on Friday, promises to cut personal income tax, pay more to pensioners and spend billions of dollars to improve food security and rural infrastructure in a bid to soothe angry voters stung by rising costs of living.
'This budget was disappointing and ties in with the deterioration we are seeing on the fiscal front,' said Fitch Ratings sovereign analyst Ai Ling Ngiam. 'The expansionary budget reverses four years of fiscal consolidation.' Fitch Ratings has rated Malaysia 'A-minus' and in January this year raised the outlook to positive from stable, citing its strong balance of payments surplus and rising external assets.
But at that time the agency had warned the relative fiscal weakness was the major negative factor for Malaysia's rating.
It said Malaysia's A-rated peers had positive primary balances and lower budget deficits.
Malaysia said its budget deficit would swell to 4.8 per cent of gross domestic product this year, well above the 3.1 per cent planned as it overshot spending on fuel and food subsidies.
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Markets also greeted with scepticism plans to bring the shortfall to 3.6 per cent next year.
Rating agencies, however, are not rushing to change their opinion on Malaysia's credit-worthiness.
'We have to see whether this is a one-off expansionary fiscal policy or there will be a medium-term implication of the fiscal expansionary policy,' said rating analyst Takahira Ogawa of Standard & Poor's (S&P) which has rated Malaysia 'A-minus'.
But he warned that sustained incidence of such budgets would not be good for fiscal consolidation and that S&P was keeping an eye on the size of the debt burden and the fiscal deficit.
The government also forecast economic growth was likely to slow to 5.4 per cent in 2009 from an expected 5.7 per cent in 2008 and said inflation would stay high until the second half of 2009.
Annual inflation hit a 27-year high of 8.5 per cent in July and analysts have been unimpressed with the authorities' efforts to rein in price growth.
'They have not been proactive. There is a risk negative real interest rates will persist for a long time,' said Moody's sovereign analyst Aninda Mitra. 'That will not be constructive for maintaining financial stability in the economy.' But while the fiscal slippage is sizeable, there is no immediate threat of a downgrade, Mr Mitra noted.
'It does not fundamentally heighten credit risk in that people are not rushing to dump Malaysian debt given the high savings rate and strong balance of payments,' he added.
Moody's has an 'A3' rating for Malaysia, the fourth lowest investment grade status.
Budget plans and this year's deficit forecast rattled credit markets, already on edge because of the stand-off between the embattled government and emboldened opposition.
Malaysia's five-year CDS or insurance-like contracts that protect against defaults or restructuring, pushed out by 5-8 basis points to about 125 bps yesterday.
And yet, credit analysts play down the risk of a rating downgrade.
'We do not expect this to lead to negative pressure on current ratings and credit spreads at the moment as the strong external position remains a major support factor,' said Lehman Brothers in a client note.
'Nevertheless, we would continue to monitor the political developments and possible implications on the economy.' - Reuters