Dagong Global Credit Rating Co., Ltd.
February 13, 2018
Dagong Global Credit Rating Co., Ltd. (hereinafter referred to as “Dagong”) has decided to upgrade the sovereign credit rating outlook of Malaysia to stable, although maintaining the local and foreign currency sovereign credit ratings at A+. The Malaysian Chinese-led economy will usher into a new era with the strategic upgrading of Belt & Road Initiative. While consolidating superstructure, Malaysia will see greater growth potential. Its repayment sources are safe and debt burden is relatively low, which guarantees government solvency.
The key reasons for upgrading the outlook of the sovereign credit rating of Malaysia are as follows:
1. Rich governing experience and strong political power aid the ruling party in sustaining the stability of the repayment environment. Given rich governing experience and popular support in the rural area, the Malaysian Barisan National is expected to win the parliamentary election in 2018, which will offer political guarantees for the country to optimize and upgrade Belt & Road strategic cooperation, enhance the construction of special economic zones, and attract additional foreign investment. In the short term, Malaysia’s policy rates will go up slightly due to the Federal Reserve’s rate rises. However, given the overall soundness of the financial system and the advanced bond market, the country’s sufficient market liquidity can continue to support the real economy.
2. Strong domestic demand will stimulate Malaysian economic growth, and the medium and long term will witness some growth potential. Given the implementation of several policies to improve people’s livelihood and the continuous improvements in employment, consumption will be the main driving force for economic growth. At the same time, Malaysia plays an active part in joining the Belt & Road Initiative and more favorable conditions will encourage domestic investment. It is projected that 2018 and 2019 will witness the Malaysian economy grow at 5.2% and 4.9%, respectively. In the medium and long term, Malaysia has abundant natural resources, a diversified industrial structure and a distinct geographical advantage. The country’s enthusiastic response to the Belt & Road initiative will help highlight its comparative advantages economically and expand development space internationally, thus it is forecasted that in the medium and long term, Malaysia’s economy will grow at around 4.9%.
3. The fiscal deficit narrows and repayment resources become safer. To achieve fiscal balance in 2020, the short term will see Malaysian government continue to optimize its spending structure, limit development expenditures and rationalize various subsidies. It is expected that in 2018 and 2019, the Malaysian general government’s fiscal deficit will narrow to 0.8% and 0.4%, while the ratio of general government’s financing needs to fiscal revenues at the same period will hit 32.8% and 33.7%. In the medium term, thanks to fiscal consolidation and rapid growth, fiscal deficit narrowing will help further improve the structure of government repayment sources, which will thereby become safer.
4. Malaysia’s debt drops slightly, and government solvency is stable. Given Malaysia’s medium-high growth and narrowing fiscal deficit, it is forecasted that the ratio of the Malaysian general government’s debt burden to fiscal revenues will drop to 258.9% and 254.0% in 2018 and 2019, respectively, and will continue to decline in the medium term, thus stable local-currency solvency. Meanwhile, due to strong appreciation of ringgit, Malaysia's total external debt fell by 9.3 percentage points to 65.2% of GDP in 2017, and international reserves coverage on overall external debt increased to 50.6%. As a result, external liquidity risks have declined, and foreign-currency solvency improves.
The main reasons for maintaining the local and foreign currency sovereign credit ratings of Malaysia include: first, Malaysia has seen dramatic increases in property prices and household debt since 2008 while relatively high revenues have incurred potential risks facing the property market; second, the Malaysian banking sector has a high proportion of short-term external debt, thus in the short term, growing fluctuations in the international financial market will impact banking stability and thereby entail liquidity risks; third, government financial assets coverage on total debt stands at 25.7%, so financial cushion is limited. In general, Dagong will follow any changes in the rating factors of Malaysia and adjust its rating timely.