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S&P revises Malaysia's outlook to stable from negative, expects 2022 GDP growth to hit 6.1%

KUALA LUMPUR (June 27): S&P Global Ratings has revised upward its rating outlook on Malaysia’s long term sovereign credit ratings to stable from negative, reflecting its expectation that the country’s steady growth momentum and strong external position will remain in place for the next two years.

At the same time, it anticipates that the policymaking environment will be supportive of restoring fiscal settings to a firmer footing.

“We revised the outlook to stable in recognition of Malaysia's consistently strong growth trend that is faster than sovereigns of similar income level. Though Malaysia's budget deficits remain high, we expect its growth dynamics to offset vulnerabilities associated with its weak fiscal settings. In addition, political commitment to resume fiscal consolidation post-pandemic is strong, in our view," S&P said in a statement on Monday (June 27).

At the same time, it affirmed its 'A-' long-term and 'A-2' short-term foreign currency sovereign credit ratings on Malaysia, as well as its 'A' long-term and 'A-1' short-term local currency ratings on the country.

“Our affirmed ratings on Malaysia reflect the country's strong external position, monetary policy flexibility, and record of supporting sustainable economic growth. The country's elevated government debt stock and weak fiscal performance temper these strengths,” it said.

The ratings agency previously revised Malaysia's outlook to negative from stable in June 2020, citing heightened risks to fiscal metrics due to the Covid-19 pandemic.

On GDP, S&P is projecting a strong pick up in Malaysia’s GDP growth to hit 6.1% for 2022.

It believes that the strong growth momentum will persist in the second half of the year, as Malaysia is a net energy exporter and major producer of crude palm oil (CPO).

“The country is well positioned to benefit from the high commodity price environment. Despite pressures from the Russia-Ukraine war and global supply-chain disruptions, we envisage the easing of domestic Covid-19 restrictions, sustained demand and strong labour market to contribute to economic recovery.

“The Malaysian economy is well-diversified and has a record of resilience, following periods of adversity. It has a mature electrical and electronics (E&E) sector that supplies components and finished products to major global players.

“We expect E&E, along with the oil and gas sector, taking gains from high energy prices, to drive strong exports over the next one to two years. We forecast that the economy will expand on average 4.7% per annum over 2023-2025,” it said.

With this, S&P expects Malaysia's 10-year weighted average per capita GDP will be close to 3%, which it said is well above the global median for peers at similar income levels. "We project Malaysia's GDP per capita to be about US$11,900 by end-2022, lower than most peers' in the same rating category but notably higher than that of most of its Southeast Asian neighbours, except Singapore and Brunei."
'Political fluidity remains but uncertainties regarding policy-making have somewhat subsided'

S&P also noted that while there remains political fluidity, uncertainties regarding policymaking have somewhat subsided.

"In September 2021, the government signed a memorandum of understanding (MOU) with the opposition. The MOU addresses bipartisan cooperation on Budget 2022, political stability and long-term political reforms. Hence, we expect fewer disruptions to policy directions until at least the next general elections (which are due by September 2023)."

It also expects the government to be committed to resume its consolidation trajectory from next year, following the full reopening of the economy and reduced need for fiscal stimuli and a more conducive policy-making environment.

"As a result, we forecast net general government debt to stabilize at about 70% of GDP from 2022-2025, with the annual change averaging 4%," it noted.

As for legacy liabilities associated with state-linked investment firm 1Malaysia Development Bhd (1MDB), S&P estimates that this stood at MYR17.5 billion at end 2022. "Come 2023, most of the 1MDB liabilities would be extinguished, with one remaining RM5 billion (0.3% of GDP) sukuk maturing in 2039," it noted.

"Committed guarantees excluding the 1MDB obligations have consistently risen in recent years, and we believe this will remain the case over the next three years, as the government continues to support key infrastructure projects and associated firms. But as a share of GDP, these committed guarantees should be steady, in our view," it added.

On foreign reserves, it estimates that Malaysia's reserves coverage will be 4.7 months of current account payments at the end of this year. "Though lower than historical levels, it remains sufficient, and we expect Malaysia's deep capital markets to support financial stability. Our forecast assumes that reserve coverage will continue to decline to 4.3 months through 2025," it added.

In a separate statement, minister of finance Tengku Datuk Seri Zafrul Abdul Aziz said S&P's latest outlook for Malaysia is in line with the government's expectation of higher GDP growth in the coming quarters, and at the higher end of Bank Negara Malaysia's official estimate of 5.3%-6.3%.

The minister also reiterated the government’s commitment towards fiscal consolidation and ensuring fiscal sustainability.

“As part of its reform initiatives to strengthen public finances by improving fiscal discipline, expenditure effectiveness, and transparency, the Government is also working to enact the Fiscal Responsibility Act (FRA),” he said.

Expected to be tabled by end of this year, the FRA will increase transparency and accountability in particular by publishing a tax expenditure statement, a midyear budget report, and a fiscal risk statement, he added.


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