- Pressure is building on emerging Asian sovereign credit profiles, according to Fitch Ratings in a report released on Monday.

- Sovereigns across the region are seeing the effect on growth, external finances, and public finances from a combination of weaker commodity prices, drag from a run-up in private sector leverage, and anticipation of higher interest rates in the US.

- On Malaysia, it said its ‘A-’ rating with a “negative” outlook reflects pressure on the sovereign’s credit profile.

- It attributed it to an ongoing leveraging-up of the economy, particularly in the broader public sector and households, and weakening macro fundamentals due to a widening savings investment gap.

- However, the rating is balanced by reasonably strong growth rates and an external solvency position that is still strong.

- Also, Fitch said Malaysia’s high dependence on commodities remains an inherent structural weakness of the credit.

- On the recent implementation of the Goods and Services Tax (GST), it said the move to introduce the consumption tax could be supportive of fiscal finances.

- That said, Fitch indicated that GST on its own is unlikely to achieve the targeted deficit reduction without the government making further spending cuts.

- Elsewhere, the sovereign rating agency highlighted contingent and off-balance sheet liabilities as a weakness in the broader public sector’s finances.

- Note that federal government guaranteed debt grew by 9.7% YoY to RM172.0bil in 2014. Government guarantees had accounted for 15.5% of GDP in 2014 vs. 15.4% in 2013.

- In terms of positive sensitivities, Fitch acknowledged greater confidence in the authorities’ commitment to contain direct and indirect public indebtedness.

- As for the negative aspects for Malaysia, it highlighted the sustained “twin” fiscal and external deficits. As such, failure to consolidate the public finances leads to the emergence of a structural current account deficit.

- The other negative for the country is a shock to interest rates or employment which can affect households’ debt servicing capacity. That could potentially trigger a need for sovereign support to the banking system.

- Fitch also warned that slips to the government’s fiscal targets and the lack of progress on budgetary reform as another negative for Malaysia.

Source: AmeSecurities Research - 24 Jun 2015