Published February 4, 2009

Fitch RM rating downgrade causes concern

Industry chiefs call for review of govt policies that impede foreign investments

By PAULINE NG
IN KUALA LUMPUR

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CORPORATE chieftains, anxious over the drifting economy and expected drop in foreign direct investments, have called for proactive measures after a ratings agency revised its outlook for the Malaysian ringgit from 'stable' to 'negative'.

CIMB group chief executive Nazir Razak yesterday suggested the government display leadership beyond orthodox fiscal stimulus and monetary measures, and review policies which impede investments and economic efficiencies so as to better position Malaysia to take advantage of the global economy when it recovers.

Mr Nazir's brother Najib is currently the deputy premier and finance minister but is set to become prime minister in March under a leadership transition plan. He is likely to announce details of a second stimulus package this month following a RM7 billion (S$3 billion) stabilising plan in November.

Meanwhile, the Malaysian ringgit opened 1.14 per cent lower at 3.65 to the US dollar but traded within the 3.62/63 band as the day progressed. Currency traders expect the ringgit which over the past weeks has been weakening on significantly softer exports and a widening fiscal deficit, to trade within the 3.58 to 3.63 band in the short term. Since the end of last year, the currency has lost some 10 per cent to the greenback.

'It was already relatively volatile in the past year, but the ringgit is a small market with not many players,' said a trader at a local bank of the currency which is not traded off-shore.

'At the most, it will go back to 3.8,' quipped a banker in reference to the ringgit's fixed peg to the dollar of more than seven over years before it was dismantled in mid-2005 and floated against a basket of currencies.

But he said there was 'little to contest' about Fitch's decision given the widespread leadership squabbles at the expense of the economy and at a time of unprecedented global meltdown.

The latest political imbroglio involves the ruling and opposition coalitions in the state of Perak attempting to destabilise each other by luring crossovers. 'The economy is not going anywhere,' he observed.

Fitch's director of Asia Sovereign Ratings Franklin Poon said as much in the media statement. 'In general, the country has been slow to implement structural fiscal reforms,' he remarked, and gave the worsening of Malaysia's fiscal position in 2009 and 2010 as the major reason for the downward revision in the Outlook on the local currency which applies to ringgit-denominated debts and not global bonds.

The international rating agency, however, affirmed the long-term local currency at A+. It affirmed the long-term foreign currency at A- and maintained the Outlook at stable.

Even without factoring in the second batch of spending, Fitch has forecast Malaysia's fiscal deficit at 5.2 per cent of GDP in 2008. It is projected to grow to 5.7 per cent this year, widening in 2010 to 7.4 per cent.

Official estimates are lower, the government expecting the fiscal deficit at 4.8 per cent for 2008.

Malaysia's tax base remains small at some 20 per cent of GDP, and its reliance on oil revenue has grown to the extent it now accounts for 40 per cent of total revenue.

Tax revenues for 2009 also hinge on US$100 per barrel oil, but with prices having plunged to less than half projected, the revenue difference is certain to be large - and bound to be worse in 2010 because of the global recession.

Fitch pegged Malaysia's debt/GDP ratio to rise to 50 per cent in 2010 from 40 per cent last year. More than half of the debts are due within the next five years.

On the brighter side, less than 7 per cent of the country's debts are foreign currency-denominated, and its net external assets higher than the 'A' category median. Its official foreign reserves also remain 'comfortably high.'