Fitch Ratings has affirmed Malaysia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-' but revised the outlook from Stable to Negative. Fitch has also projected the Malaysian economy to register a growth of 5.8% in 2021.

Globally, countries have responded with substantial fiscal and monetary measures to cushion the economic impact of COVID-19. It has also been observed that the sovereign ratings outlook for several economies, both advanced and emerging, have also been lowered. While the justifications are unique to each country, the revision in the ratings outlook of these countries broadly reflects weaker growth prospects and fiscal positions compared to the period prior to the global health crisis.

Malaysia has responded to the global health crisis and synchronised worldwide economic shock in a timely, decisive and comprehensive manner. The recently launched RM260 billion economic stimulus package, dubbed PRIHATIN, had outlined its three main thrusts: “Protect the People, Support Businesses & Strengthen the Economy”. PRIHATIN’s public health, fiscal, monetary and financial measures are aimed at protecting lives and vulnerable groups in society, alleviating businesses’ cash flow pressure and preserving jobs.
 

Collectively, Malaysia’s economic stimulus measures are expected to add 2.9 percentage points to its 2020 GDP growth. These comprehensive measures would place Malaysia on a stronger footing to benefit from the projected global recovery in 2021.

Despite the sizeable fiscal outlay in the economic stimulus packages, the Government’s commitment towards fiscal discipline has not wavered. To ensure limited medium-term implication to public finance, measures introduced are one-off, temporary and time bound. As these measures are non-recurring expenditures, fiscal consolidation efforts will resume once health and economic conditions stabilise. Further supporting this is the Government’s positive track record of fiscal consolidation where the fiscal deficit has declined by half from -6.7% of GDP in 2009 to -3.4% of GDP in 2019.

The Government will continue to focus on governance and structural reforms to place the country on a firmer footing. The Government remains committed to a reform agenda ensuring sound governance, strengthening institutions and combating corruption even as it pursues existing initiatives with the establishment of the Debt Management Office and the upcoming enactment of a Fiscal Responsibility Act in 2021. The medium-term fiscal strategy will be enumerated in the Fiscal Outlook and Federal Government Revenue Estimate Report that will be issued together with the 2021 Budget in October 2020.

Malaysia continues to maintain a healthy external position with substantial external assets by banks and corporations, a current account surplus and adequate level of international reserves. Malaysia’s foreign currency external assets continue to exceed its foreign currency external liabilities. As at end-2019, Malaysia’s net foreign currency external asset position stood at a sizable RM924 billion, as 94.5% of external assets are denominated in foreign currency compared to 41.4% of total external liabilities. Together with the flexible exchange rate, these will continue to serve as important buffers against potential external shocks.

Reinforcing Malaysia’s external resilience is our highly liquid and deep domestic Government bond market and the presence of strong domestic institutional investors. This has enabled Malaysia to substantially reduce reliance on foreign currency financing. As a result, about 96% Malaysia’s Federal Government debt is issued in Ringgit and therefore, not subject to currency mismatches. The decline in foreign holdings of Government bonds from a peak of 34% in 2016 to around 21.5% currently has also mitigated the impact on borrowing costs.

While COVID-19 poses some risks to financial stability, Malaysian banks are now much more resilient compared to previous crises. In particular, the strong buffers of the banking system that have been built over the years and sound risk management practices are expected to mitigate the impact of any deterioration in credit quality and support continued lending by banks to the economy. Notably, excess capital buffers of banks stand at RM121 billion, more than three times the buffer during the 2008/09 Global Financial Crisis. Net impairments remain low at only 1.0% of total banking system loans. The banking industry’s Liquidity Coverage Ratio at 148%, stands well above the minimum requirement of 100%. These buffers, along with sound and prudential risk management practices, place banks in a good position to support lending activities and the overall Malaysian economy.

Malaysia has entered this unprecedented period from a position of strength, with a healthy financial system, strong domestic institutional investors, adequate buffers and robust policy frameworks that have been developed over the years. These factors and ongoing efforts to further strengthen Malaysia’s policy frameworks will continue to serve the Malaysian economy well during this challenging phase.

YB TENGKU DATO’ SRI ZAFRUL AZIZ
Minister of Finance
Putrajaya
9 April 2020