KUALA LUMPUR, March 12 — Governance reform will be crucial to prevent a downgrade of Malaysia’s sovereign rating as it confronts the Covid-19 pandemic that has taken a severe toll on global trade, Fitch Ratings said today.
The caution comes as the country’s’ small open economy faces challenges posed by the recent political volatility and the worsening virus outbreak, which has shaken world markets and prompted a sharp drop in oil prices.
Fitch said the oil price drop is expected to strain the nation’s public finances and possibly affect its deficit target.
Malaysia is a net oil exporter, and these price developments will have an adverse effect on its oil revenue. The Budget had assumed an average oil price of US$62 per barrel in 2020.
“The challenges posed by Malaysia’s recent political volatility and the global coronavirus epidemic are being exacerbated by a sharp drop in oil prices that will add to the strains on the nation’s public finances,” the ratings agency said.
“How much these factors affect Malaysia’s sovereign outlook will depend on their impact on the country’s economic metrics and the policy approach that the new government adopts, in particular with respect to public finances and governance reforms.”
Fitch estimated government revenue to be about 0.4 per cent of GDP lower than the Budget assumed, should oil prices stabilise at around US$40 a barrel in 2020, among other factors.
Just last month, the former Pakatan Harapan (PH) government revised this year’s GDP forecast from 4.7 to between 3.2 and 4.2 per cent as it had expected the worsening Covid-19 outbreak to dent growth.
PH collapsed just two weeks ago after several of its MPs defected and Tun Dr Mahathir Mohamad quit as prime minister.
Its successor, the Perikatan Nasional government led by Tan Sri Muhyiddin Yassin, has yet to outline a clear fiscal plan but the prime minister has said he plans to continue many of PH’s economic policies.
Fitch said the medium-term fiscal outlook is an important rating driver for Malaysia as public debt, at 62 per cent of GDP, is high relative to the median of its ‘A’ rated peers (50 per cent).
“The transition to the new government occurred relatively quickly and smoothly, and some policies — such as a focus on infrastructure development — are likely to remain intact,” it said.
“Nevertheless, the political volatility surrounding the transition illustrates heightened policy uncertainty and may dampen investor sentiment, constraining economic growth.”
This effect will be particularly marked in the next few weeks, as the new administration’s support in the legislature will remain unclear until parliament reconvenes in May, but may also endure over the medium term.
“Foreign investors’ perceptions of Malaysia’s political stability will be significant, all the more so against bouts of global risk aversion,” Fitch said.
Foreign holdings of domestic government bonds amount to some 24 per cent of the total, down from a high of 33 per cent in 2016, the firm noted.
