Published November 11, 2008

Economists shrug off Malaysia's 'stable' rating

By PAULINE NG
IN KUALA LUMPUR

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A REVISED ratings outlook on Malaysia to 'stable' from 'positive' has been shrugged off by economists, who said that the economy does not have any imbalances likely to trigger a crisis.

All systems go: Malaysia's reserves are still strong at RM345.5 billion, which is more than enough to cover eight months' imports

The downgrade by Fitch Ratings is partly based on the likely impact that falling oil and other commodity prices, as well as weakening external demand for electronics exports, would have on Malaysia's balance of payments.

'Malaysia is one of Asia's more open economies and the region's only significant net oil exporter,' Fitch said in a statement announcing the revision.

South Korea's outlook - to 'negative' from 'stable' - is the only other revision by Fitch after a global review of the sovereign ratings of 17 major investment-grade emerging market economies in the wake of the global financial crunch.

RAM Ratings chief economist Yeah Kim Leng said: 'Fitch is saying we are exposed to the downturn because of our large trade exposure. But it's relative deterioration - which countries are more resilient in this crisis - that matters. Malaysia does not have any asset bubbles or a negative investment gap. And it is not a creditor nation.'

The recent capital flight from Malaysia is also not unexpected, according to Mr Yeah. Countries with relatively open markets face sharp capital reversals in any crisis, he said. Of greater importance is whether capital outflow poses significant risk to an economy.

He believed that it does not pose a threat to Malaysia, because the size of the outflow relative to the country's foreign reserves and domestic liquidity or surplus, is much smaller than during the Asian financial crisis of the late 1990s.

Despite losing a massive RM26 billion (S$10.9 billion) in foreign exchange reserves over two weeks in October when stock markets went into a tailspin on fears of a deep and long global recession, Malaysia's reserves are still strong at RM345.5 billion, which is more than enough to cover eight months' imports.

Even an expected expansion in the budget deficit to 4.8 per cent of gross domestic product (GDP) next year - in part because of an additional RM7 billion allocated for pump-priming - is not a 'stand-out' figure, said Mr Yeah. Increased spending is necessary to prevent further deterioration in growth next year, which is now projected at 3.4 per cent instead of 5.4 per cent.

The electronics sector accounts for almost 40 per cent of the total exports of Malaysia, whose total trade to GDP is about 160 per cent.If economic fundamentals deteriorate, Fitch's revised outlook could be made official, making it more costly for Malaysia to borrow because of the higher risk premium.

'The revised outlook is not unexpected,' Mr Yeah conceded. 'But by right, Fitch should be putting the US under the microscope given its deficit is 5-6 per of GDP and its debt level is 60-70 per cent of GDP.'