Economic Update - S&P affirms Malaysia’s “stable” outlook
In another show of confidence, S&P has reaffirmed Malaysia’s Asovereign credit rating and its “stable” outlook based on 1) expectations that the fall in oil price will not disrupt Malaysia’s long-term fiscal consolidation, 2) fiscal consolidation measures to mitigate the fallout of the slump in oil prices, and 3) the country’s strong external position and monetary flexibility that will counterbalance its moderate fiscal performance. Last week, Moody’s had reaffirmed Malaysia’s sovereign outlook. The show of support for the country’s macroeconomic strength will help to shore up confidence in the local currency, which has appreciated following the rebound in oil price. However, we concur that more efforts are needed to ensure the continuity of fiscal reform measures, improve spending efficiency and manage the rise in contingent liabilities and off-budget financing.
News
S&P has affirmed Malaysia's long-term sovereign rating at A- and its “stable” outlook. It also lowered its average Brent crude oil price assumptions to US$55/bbl in 2015 and US$70/bbl in 2015-2018 (US$105 and US$100 previously). Nevertheless, S&P still expects the government to maintain its long-term target to balance the federal budget by 2020. It believes Malaysia's external position is strong enough to withstand a slowdown in the oil and gas sector over the next two years. It also views measures to rationalise oil subsidies and introduce the Goods and Service Tax (GST) this year as helping to accelerate fiscal consolidation and allow for a reduction in government debt. S&P may raise the ratings if stronger economic growth and the government's efforts to cut spending reduce deficits further, leading to lower debt and interest-servicing costs. It may lower the ratings if the government fails to deliver reform measures that include implementing the GST, reducing welfare transfers, boosting private investments and diversifying the economy.
Analysis
Malaysia’s accumulation of healthy current account surpluses over the past 17 years has helped to underpin the ratings. Although its net external position has turned negative, the government said that external indicators are likely to stay close to current levels owing to continued trade surpluses over the next 2-3 years. Economic growth will be supported by its fairly diversified and competitive manufacturing and services base. As such, the oil price slump is unlikely to materially impact economic growth over the next 24 months given that production of crude oil and LNG accounts for only about 10% of GDP.
What we think
Generally, we agree with S&P’s overall analysis. However, we are cautious about the fiscal outlook from 2016 onwards, particularly if oil prices remain at lower levels for an extended period. We reiterate that the concerns are likely to start kicking in as 2016 approaches and the impact of lower oil prices is fully transmitted. As such, the government will have to implement further non-oil revenue enhancements and continue to restrain operating expenditure to ensure further fiscal deficit reduction next year.
Source: CIMB Daybreak - 12 February 2015
In another show of confidence, S&P has reaffirmed Malaysia’s Asovereign credit rating and its “stable” outlook based on 1) expectations that the fall in oil price will not disrupt Malaysia’s long-term fiscal consolidation, 2) fiscal consolidation measures to mitigate the fallout of the slump in oil prices, and 3) the country’s strong external position and monetary flexibility that will counterbalance its moderate fiscal performance. Last week, Moody’s had reaffirmed Malaysia’s sovereign outlook. The show of support for the country’s macroeconomic strength will help to shore up confidence in the local currency, which has appreciated following the rebound in oil price. However, we concur that more efforts are needed to ensure the continuity of fiscal reform measures, improve spending efficiency and manage the rise in contingent liabilities and off-budget financing.
News
S&P has affirmed Malaysia's long-term sovereign rating at A- and its “stable” outlook. It also lowered its average Brent crude oil price assumptions to US$55/bbl in 2015 and US$70/bbl in 2015-2018 (US$105 and US$100 previously). Nevertheless, S&P still expects the government to maintain its long-term target to balance the federal budget by 2020. It believes Malaysia's external position is strong enough to withstand a slowdown in the oil and gas sector over the next two years. It also views measures to rationalise oil subsidies and introduce the Goods and Service Tax (GST) this year as helping to accelerate fiscal consolidation and allow for a reduction in government debt. S&P may raise the ratings if stronger economic growth and the government's efforts to cut spending reduce deficits further, leading to lower debt and interest-servicing costs. It may lower the ratings if the government fails to deliver reform measures that include implementing the GST, reducing welfare transfers, boosting private investments and diversifying the economy.
Analysis
Malaysia’s accumulation of healthy current account surpluses over the past 17 years has helped to underpin the ratings. Although its net external position has turned negative, the government said that external indicators are likely to stay close to current levels owing to continued trade surpluses over the next 2-3 years. Economic growth will be supported by its fairly diversified and competitive manufacturing and services base. As such, the oil price slump is unlikely to materially impact economic growth over the next 24 months given that production of crude oil and LNG accounts for only about 10% of GDP.
What we think
Generally, we agree with S&P’s overall analysis. However, we are cautious about the fiscal outlook from 2016 onwards, particularly if oil prices remain at lower levels for an extended period. We reiterate that the concerns are likely to start kicking in as 2016 approaches and the impact of lower oil prices is fully transmitted. As such, the government will have to implement further non-oil revenue enhancements and continue to restrain operating expenditure to ensure further fiscal deficit reduction next year.
Source: CIMB Daybreak - 12 February 2015
