KL bullish after ratings downgrade

Malaysian trade minister Mustapa Mohamed. Source: Flickr

Malaysian trade minister Mustapa Mohamed said Moody’s decision to maintain Malaysia’s sovereign credit rating at A3 on Monday showed that the country was on the right track.

Mustapa said: “Under the current circumstances, it is to our credit. Despite the current challenges, we maintain our rating, although outlook [was downgraded] from positive to stable, it goes to show we are on a right track although it is challenging.”

Minister in the Prime Minister’s Office Abdul Wahid said on Monday that the downgrade of the country’s outlook from positive to stable reflected the global environment and did not reflect Malaysia’s strong fundamentals.

However, Mustapa said exports were lower than expected following the global economic slowdown. Industrial output in November grew 1.8 per cent, its slowest since July 2014 and well below the median forecast of 4 per cent from a Reuters economist poll.

Malaysia, Southeast Asia’s third-largest economy after Indonesia and Thailand and a gas and commodities exporter, has suffered with falling oil prices and a slowdown in China, its biggest export market.

The ringgit was Asia’s worst performing currency last year, falling 20 per cent against the dollar.

Reduced oil prices are forcing the government to reassess its 2016 budget following an expected shortfall in revenue, while further spending cuts may be on the cards as Malaysia looks to cut its fiscal deficit.

A slide in Brent crude oil to an 11-year low prompted Prime Minister Datuk Seri Najib Razak to review this year’s budget.

The price is much lower than the US$48 assumption in Najib’s budget.

Plantation Industries and Commodities Minister Datuk Seri Douglas Uggah Embas said last week that Malaysia risked losing RM300 million (US$68 million) for every one dollar fall in the oil price.

Moody’s Investors Service cut the Malaysia’s credit outlook this week to stable from positive, citing the impact on government revenue.

The currency snapped a two-day gain and fell 0.6 per cent to 4.4 a dollar.

“Falling crude oil prices and uncertainty involving the slowdown in China are weighing on the ringgit,” said Zulkiflee Mohd Nidzam, head of foreign-exchange and bond trading at Kuala Lumpur-based Asian Finance Bank Bhd.

“If these persist, the ringgit could weaken further to 4.45 a dollar in the near term.”

Since Moody’s assigned a positive outlook in November 2013 the government has sought to improve its finances, rationalising fuel subsidies and putting in place a goods and services tax, the ratings company said.

But the impact on the balance sheet has been limited and will remain so, in part due to changes in the external environment. Bonds rise Malaysia’s 10-year government bond yield fell two basis points to 4.22 per cent, according to prices from the stock exchange. The five-year yield dropped five basis points to 3.47 per cent, the biggest decline in three weeks.

He aimed to cut the fiscal deficit to 3.1 per cent of gross domestic product this year from an estimated 3.2 per cent last year.

China is now Malaysia’s largest foreign investor, following its recent acquisition of 1MDB assets, although a year ago it was nowhere near the top of the list. While official figures for last year are not out yet, economists say China will definitely be in first place.

In 2014, foreign direct investment (FDI) to Malaysia mainly originated from Singapore, Japan, the Netherlands, the USA and Norway, amounting to RM257.7 billion (US$58 billion).

“I do not expect China’s pole position for FDI to be sustainable as Malaysia wants to move up the value chain into high technology. That will come from its traditional FDI sources of US, Japan, EU and Singapore,” says Yeah Kim Leng of the School of Business at the Malaysia University of Science and Technology.

China, however, has been Malaysia’s largest trading partner since 2009 for both exports and imports.