MARC affirms Malaysia's sovereign rating at AAA; outlook stable

PETALING JAYA: MARC has affirmed Malaysia's sovereign rating of AAA with a stable outlook based on country's ability to meet its local currency obligations.
"Supporting Malaysia's AAA rating is its enviable track record of economic resilience that continues to be underpinned by sound and proactive macroeconomic policies," MARC said in a statement last Friday.
"The stable outlook reflects MARC's assumptions that there will be no more significant downside in crude oil prices in 2015, and that both domestic and global economic growth will moderate gradually. We also assume that the government remains committed to fiscal-consolidation efforts, as well as efforts to contain direct and indirect public indebtedness," it said.
It added that the stable outlook is also based upon expectations of household debt levels to moderate going forward in response to Bank Negara Malaysia's (BNM) macro-prudential policy measures.
It pointed out that inflation has been tame, a reflection of BNM credibility and sound monetary policy management.
"The central bank has managed to balance the risks surrounding the outlook for domestic growth and inflation, and avoided financial imbalances," MARC said.
Another rating support is Malaysia's strong and well-supervised banking system. "The banking system remains highly capitalised and profitable," it said.
MARC also noted the narrowing of the Malaysian current account surpluses are not necessarily a bad thing.
"When viewed from a saving-investment perspective, it reflects the fact that domestic demand has been driving economic growth as the external economic environment remains weak," it explained.
MARC said BNM's foreign exchange reserves, which stood at US$115.9 billion as at end-Dec 2014, is deemed sufficient to cushion any volatile and disruptive portfolio capital flows, while offshore borrowings is not expected to pose any risks.
However, MARC noted that rating constraints on Malaysia include persistent annual fiscal deficits, high government debt, as well as rising government guarantees.
MARC noted though that the fiscal health of the government has improved "questions remain over whether the government will be able to achieve a balanced budget by 2020, especially after the collapse of crude oil prices in 2014.
"The federal government debt level has been sustained at near the self-imposed threshold level of 55% of GDP (2014: 54.5% of GDP). Mitigating this rating constraint is the composition of the debt, the bulk of which (about 95%) is ringgit-denominated. Meanwhile, government guarantees stood at 16.1% of GDP as of end-2014," it said.
However, MARC noted that notwithstanding Malaysia's strong and well-supervised banking system, the high level of household debt is a rating constraint.
"At 87.9% of GDP (2014), it is a risk factor even if the bulk of household loans are secured.
"The high household debt level, when juxtaposed against Malaysia's relatively low GDP per capita and household income, presents a genuine concern. It heightens the risk of further deterioration in household balance sheets that could affect Malaysia's future growth trajectory to some degree," it said.
The risks coming from high household debt is magnified when Malaysia's moderating pace of economic growth in 2015, as well as ongoing economic uncertainties in the global arena, are taken into consideration, it added.