Fitch Ratings: Vaccine rollout and political instability biggest hurdles in Malaysia’s economic recovery

Fitch said that the main risk to Malaysia’s growth outlook — both in 2021 and 2022 — is the timeline and efficacy of the vaccination programme. ― Reuters pic
Fitch said that the main risk to Malaysia’s growth outlook — both in 2021 and 2022 — is the timeline and efficacy of the vaccination programme. ― Reuters pic

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KUALA LUMPUR, Jan 27 — Like many other countries, Malaysia’s growth and recovery outlook is dependent on the rollout of its vaccination programme as well as the current political volatility, says Fitch Ratings.

Noting that the recently announced RM15 billion stimulus package, which includes the vaccination cost of RM3 billion, does not affect the country’s credit profile, Fitch said that the main risk to Malaysia’s growth outlook — both in 2021 and 2022 — is the timeline and efficacy of the vaccination programme.

“We assume that the authorities will start vaccinating in March, and inoculate enough of the population by early 2022 that they will be able to relax the vast majority of pandemic-related restrictions.

“The risks around the pandemic add to existing uncertainties about the medium-term direction of policy and governance,” said Fitch in a statement here today.

It said that the state of emergency, which is slated to last until August 1, may compound the impact of persistent political instability in recent years, which contributed to the financial rating downgrade in December.

“Political volatility weakens prospects for improvements in governance and may have a dampening effect on private investment growth, which has declined since mid-2018 relative to previous years,” said the credit rating and research agency.

It however acknowledged that the power struggle did not deter swift government response to the pandemic, including the passage of core legislation in Parliament to implement relief measures prior to the introduction of the state of emergency.

Fitch also said that the latest stimulus package unveiled on January 18 does not in itself significantly alter its rating of Malaysia’s credit profile.

“The fiscal package is designed to mitigate the impact of a resurgence of the virus and the new round of tightened social distancing measures in large parts of the country announced on January 11. However, more than half of the announced RM15 billion (about 1 per cent of GDP) stimulus consists of a reprioritisation of previous measures, including RM3 billion to cover the cost of the Covid-19 vaccination programme.

“The authorities expect the impact of the additional spending on Malaysia’s fiscal deficit to be offset by revenues associated with a recent rise in oil prices and spending cuts elsewhere in the budget. Hence, at this stage they have not revised their previous 2021 fiscal deficit target of 5.4 per cent of GDP, down from an estimated outturn of 6.0 per cent in 2020. Fitch continues to view the 2021 target as achievable,” it said.

Although the medium-term outlook for public finances remains a key rating sensitivity for Malaysia, the country has fiscal headroom at its current rating of “BBB+” with a “stable outlook”, following a downgrade of the rating from “A-” in December 2020.

“The downgrade was driven by a weakening of several key credit metrics amid the pandemic shock, in particular relating to the sovereign’s fiscal burden, which was already high relative to peers going into the health crisis,” it said.

Fitch had earlier reported that the latest lockdowns will dampen this year’s growth rebound in Malaysia.

Although measures are less stringent than those imposed in March last year, Fitch said there is growing evidence from other countries that the successive imposition of controls is having a weaker impact on economic activity.

“Nonetheless, the ultimate impact of the lockdowns will depend on how long they are maintained, whether they are extended to other regions, and whether controls are tightened. These factors will be influenced by how effective the measures are in containing new Covid-19 cases,” it said.

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