Moody's Investors Service has a stable outlook on Malaysia's A3 sovereign rating which balances its relatively healthy growth outlook and still formidable foreign exchange reserve buffer against its susceptibility to external demand. The international ratings agency said on Thursday following the implementation of countercyclical measures in the wake of the global financial crisis, fiscal and debt ratios worsened and have yet to recover to pre-crisis levels. (Source: StarBiz)

-  Malaysia's A3 government bond rating is based on an assessment of moderate economic resiliency, supported by a highly open, medium-sized economy and a well-diversified external sector. However, economic growth has been relatively dependent on public sector expenditure.

-  Moody's said the high degree of government financial strength was underpinned by the country's strong external position and high savings rates compared with peers.

-  Aside from that, Malaysia's large stock of foreign exchange reserves provides a buffer against exogenous shocks that could otherwise undermine government finances.

-  However, extensive price administration and low private investment have necessitated greater government spending on subsidies and infrastructure. Malaysia's fiscal framework has also grown more dependent on commodity revenues in the absence of broad tax reform which raises structural pressures.

-  The rating agency said Malaysia has strong and well-managed corporate and banking sectors and its state-owned enterprises were undergoing reform.

-  In the upcoming budget, we do expect fiscal consolidation efforts to be announced which could include the gradual rationalisation of subsidies and the implementation of GST. Note that overall government subsidies had accounted for 21.2% of revenue in 2012 and 17.8% in 1Q13.

-  As a recap, in response to the recent downgrade of the country's sovereign credit outlook by Fitch Ratings, the Prime Minister Datuk Seri Najib Razak said the government will unveil a number of policies in the forthcoming national budget to strengthen its fiscal and macro position.

-  Due to cuts in subsidies, prices are expected to rise in 2014 following the modest CPI growth of 1.6% as of YTD June 2013. Ahead of the inflation statistical release on August 21, we expect inflation to grow by 1.9% in July following the price increase of 1.8% in the preceding month.

-  With the probable fiscal reformations and reduced subsidies going forth, hence we do anticipate the effectiveness of government spending and at the same time the boost interms of long term national productivity despite higher price pressure.

-  Nevertheless, weak sentiments continue to weigh on the Ringgit thus bringing the currency to the weakest level against the USD since mid-2010. By the end of yesterday, the Ringgit slipped to a 3-year low of RM3.2775 (or -7.2% YTD). Averagely though, the Ringgit has been hovering at RM3.10 as of YTD 2013.

Source: AmeSecurities