• Several macro factors cited included the country's strong medium-term growth prospects and current account surpluses, with macroeconomic policymaking institutions continuing to be credible and effective, especially commitment towards the path of gradual fiscal consolidation over the next 2-3 years
• Moody’s noted that the economy has not sustained any long-term damage due to the pandemic and continues to be well positioned to take advantage of the gradual recovery in global demand

Government committed to its medium-term fiscal consolidation objectives

Moody’s has reaffirmed Malaysia’s local and foreign currency long-term issuer ratings at A3, with a stable outlook. Under Moody’s, Malaysia had maintained a rating of 'A3' with stable outlook since 11 January 2016, see Fig 1. Moody’s cited some macro factors that supported the decision on the country’s sovereign credit profile, and these included the country's strong medium-term growth prospects and current account surpluses, with macroeconomic policymaking institutions continuing to be credible and effective, especially commitment towards the path of gradual fiscal consolidation over 2 to 3 years. Moody’s highlighted the increased debt burden may leave the government with weakened fiscal strength for some time due to pandemic shock to public finances, but also added that the country's large pool of domestic savings can continue to finance the fiscal deficits and keep interest payments anchored.

Moody’s expects the country’s fiscal deficit to remain high at 5.5% of GDP in 2021, from an estimated deficit of 6.0% of GDP in 2020, with an average deficit of 4.5% of GDP projected from 2021 through 2023 (as compared to an average of 3.3% of GDP over 2014 to 2019). Moody’s cautioned some downside risk to its fiscal deficit projection for 2021, if there are additional economic stimulus measures by the Government, due to economic impact from the reinstated MCO. On the country’s macro fundamentals, Moody’s noted that “the long track record of effective policies has allowed the country to generate current account surpluses and domestic savings even during global recessions, kept inflation and inflation volatility moderately low compared to peers despite high growth rates, and maintained banking system stability through episodes of weak operating environments.”

Standard & Poor’s Ratings Services (S&P) has maintained the country’s long-term foreign currency issuer default rating at A- since 8 October 2003. Even though S&P assigned Malaysia’s outlook long-term foreign currency issuer default rating from stable to negative on 26 June 2020, we believe S&P will follow suit to maintain Malaysia’s actual ratings, which we believe hinges on government's budgetary consolidation measures going forward. Going forward, to prevent and safeguard any possible further downgrade of the country’s sovereign credit rating by the international rating agencies, apart from addressing the country’s debt dynamics through fiscal discipline, we believe safeguarding current account surpluses as well as medium-term economic growth prospects, will be key to support economic fundamentals.

Source: Affin Hwang Research - 29 Jan 2021