KUALA LUMPUR, Feb 10 — Datuk Seri Najib Razak has been warned against any major U-turn of his financial reform measures such as his government’s hesitation on the unpopular toll rate hike, as this may risk further downgrade on Malaysia’s debt rating, Credit Suisse has warned.
According to the financial services provider, more such reversals on austerity policies would only keep Malaysia under the spotlight of credit rating agencies, and cause foreign investors to flee the government bond market.
“Rating agencies are watching PM Najib to assess his resolve in the unpopular, but critical policy of reducing the fiscal deficit. The apparent U-turn on toll rate hikes is a red flag,” Credit Suisse warned in its daily report on Asia here.
“A major U-turn could cause a rating downgrade. In a rising interest rate environment, foreign investors would then sell their huge bond holdings.”
Credit Suisse described Najib’s decision to hike price of fuel, sugar and electricity as a way to assess further cuts as a “cunning” move by a government that needs to rein in its chronic budget deficit.
However, Najib’s cunning has been undermined by his fellow Umno member’s political opportunism, it said.
It cited as example the recent announcement by Deputy Prime Minister Tan Sri Muhyiddin Yassin that Putrajaya will freeze toll rates in 2014.
“Sadly, some within PM Najib’s party appear to have opted for very short-term gain, ignoring the logic and the long-term pain,” said Credit Suisse.
“Does PM Najib have the will to see this austerity through? The rating agencies are watching.”
Should rating agencies downgrade Malaysia and foreign investors abandon government bonds, it predicted that Malaysia’s stock market and ringgit will collapse, in a worst-case scenario.
Despite that, the report said it was merely highlighting a risk, and it was not Credit Suisse’s house view.
Putrajaya has embarked on a series of subsidy cuts starting from September last year, which included an increase in fuel pump price, sugar, and electricity tariffs.
Postponed prior to Election 2013, the so-called subsidy rationalisation programme was resumed after ratings firm Fitch Ratings slashed Malaysia’s sovereign debt outlook from “Stable” to “Negative” in July.
The price hikes however has caused public anger, which culminated in an anti-price hike rally attended by tens of thousands of Malaysians on the New Year’s Eve.