RHB Research: S&P, Moody’s unlikely to follow Fitch’s rating downgrade

RHB Research believes Fitch Ratings’ downgrade of Malaysia’s long-term foreign currency issuer default rating is unlikely to be followed by Standard & Poor’s (S&P) and Moody’s. ― Picture by Choo Choy May
RHB Research believes Fitch Ratings’ downgrade of Malaysia’s long-term foreign currency issuer default rating is unlikely to be followed by Standard & Poor’s (S&P) and Moody’s. ― Picture by Choo Choy May

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KUALA LUMPUR, Dec 7 — RHB Research believes Fitch Ratings’ downgrade of Malaysia’s long-term foreign currency issuer default rating (IDR) to ‘BBB+’ from ‘A-’ is unlikely to be followed by Standard & Poor’s (S&P) and Moody’s in the next few months. 

The research house said post-Covid-19 pandemic, Malaysia’s fiscal authorities would likely engage in a comprehensive fiscal consolidation strategy.

In a note today, it viewed Malaysia’s general government debt trajectory as sustainable based on RHB Research’s medium forecasts for Gross Domestic Product (GDP) growth, inflation, interest rates, and exchange rates. 

The research house said while the 2019 general government debt to GDP ratio of 65.2 per cent was higher than the median of 59.2 per cent of Malaysia’s peers and was likely to rise in 2020 and potentially to some extent in 2021, the trajectory of debt sustainability remained intact.

It expects domestic and external liquidity conditions to likely remain ample.

“We disagree with Fitch’s utilisation of ‘liquid assets and liquid liabilities’ in its assessment of Malaysia’s external liquidity position since what is liquid and what is illiquid at different points of the business and market cycle are purely subjective in nature.

“The other metric Fitch focused on was domestic banks capital buffers and asset quality visibility, (which) is strange since the ongoing changes in banking sector policy aren’t specific to Malaysia but also prevalent in other countries in the region,” it said.

It described the usage of World Bank metrics to gauge governance in Malaysia’s policy-making process and utilising this as a major input in Fitch’s rating model as “analytically improper.”

“A more on the ground bottoms up approach to gauging the future prospects for governance and the impact on the policy-making process in Malaysia is the correct methodology in our view,” it said.

RHB Research also expects the ringgit bond market to remain supported as bond dynamics are healthy on the back of continued support from onshore real money investors and still compelling real yields.

According to the research house, the 10-year Malaysian Government Securities (MGS) still provide an attractive real yield of above 4.0 per cent.

It said that any selloff in bonds and equities would be limited and temporary.

“For the ringgit, we believe the knee-jerk reaction post-Fitch downgrade would make the currency marginally weaker towards 4.1 before stabilising around that level,” it added.

Meanwhile, AmBank Research said it now remained unclear if S&P and Moody’s would follow suit.

However, it said the downgrade highlighted the need to further strengthen reforms, transparency and inclusiveness. — Bernama

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