Published February 3, 2009

Outlook for KL currency rating negative: Fitch

Agency says govt slow in carrying out structural fiscal reforms

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(KUALA LUMPUR) Fitch Ratings lowered Malaysia's local currency rating outlook to negative from stable, blaming its high fiscal deficit and public debt and on expectations its fiscal position would worsen this year and next.

The agency also affirmed the country's local currency rating at A-plus. The outlook on the A-minus foreign currency rating has been affirmed at stable.

'The global economic headwinds will further reduce government revenues while the government's economic stimulation measures will keep expenditure high despite the expected drop in energy subsidies,' the agency said in a statement.

Fitch also said the government had been slow in implementing its structural fiscal reforms, pointing to the country's tax base of 20 per cent of its gross domestic product (GDP), which it termed as narrow, and reliance on oil which formed 40 per cent of revenue.

Malaysia's fiscal deficit was seen rising to 5.7 per cent of GDP in 2009 and further to 7.4 per cent in 2010, from an estimated 4.6 per cent in 2008, Fitch said.

Last week, Deputy Prime Minister Najib Razak, who is also the finance minister, said the deficit was likely to overshoot the government forecast of 4.8 per cent this year after a second economic stimulus package worth RM7 billion (S$2.93 billion) is introduced.

'We expect the second stimulus package to be announced this month, and this is the basis for the rating outlook downgrade, because revenue will be pressured and there will be a need to spend more to help the economy,' said Forecast economist Joanna Tan. 'As for the impact on currency, this will be a ringgit negative, and no doubt borrowing costs will be adversely impacted, but we also note long-term foreign currency ratings remain the same.'

Fitch said economic growth would decelerate to 1.5 per cent in 2009 from an expected 5.5 per cent in 2008. The government forecast for 2009 economic growth stands at 3.5 per cent.

'The ratios of debt and net debt to GDP, which are worse than the A group's medians, are thus expected to deteriorate. The government's interest payments/ revenue ratio is also higher than the A median,' Fitch said in its statement.

The agency said the country's debt-GDP ratio would rise to 50 per cent in 2010 from 40 per cent in 2008, with more than half of its borrowings maturing within the next five years.

Fitch said that only 7 per cent of Malaysia's debt was foreign currency denominated and over 90 per cent of the local currency debt is held by domestic financial institutions and therefore it had little exposure to currency and re-financing risks. -- Reuters