Political risk on Malaysia's creditworthiness very low - Moody's Investors Service

Moody's Investors Service has rated the likelihood of political factors in Malaysia affecting the country's creditworthiness as very low, notwithstanding the 1Malaysia Development Berhad (1MDB) issue.

In a report on domestic political risks in Southeast Asia, the international rating agency noted that political noise had increased in Malaysia since the start of the year, but with limited impact on the reform momentum.

"Nothwithstanding the events surrounding 1MDB, our assessment of the domestic political risk in Malaysia remains at Very Low +," said the report released yesterday, assigning an A3 rating for Malaysia.

It observed that fiscal reform had actually accelerated in the country, with the government announcing its decision to implement the Goods and Services Tax (GST) during the 2014 Budget announcement in October 2013. It was implemented in April this year.

"It also effectively removed fuel subsidies when global oil prices fell last year," the report said.

Moody's Investors Service pointed out that in the 2016 Budget announced last month, the Malaysian government indicated its continuing commitment to keep its fiscal deficit under control, and further reduce reliance on oil revenue.

In addition, it said the continuation of an UMNO-led government should ensure stability in economic policy, as spelt out in the latest five-year plan (11th Malaysia Plan) unveiled earlier this year.

Besides Malaysia's A3 rating, the rating agency's report on Southeast Asia accorded a Baa 1 stable rating for Thailand, Indonesia (Baa3 stable), the Philippines (Baa2 stable) and Singapore (Aaa stable).

Vietnam and Cambodia were rated B1 stable and B2 stable, respectively.

In terms of political risk score, only Singapore and Malaysia were categorised as "Very Low" while Indonesia, the Philippines and Vietnam found themselves in the "Low" category. Thailand and Cambodia were deemed "Moderate".

Data for Brunei, Laos and Myanmar were not available.

The report said that the key question underpinning the positive outlook on the A3 rating for Malaysia was whether the country's administration could muster the political will to sustain the trend of fiscal consolidation that it initiated in 2010.

"The government has successfully chartered these waters thus far," it said.

Moody's Investors Service said its sovereign rating methodology incorporated domestic political risk as a factor in evaluating a country's susceptibility to event risk.

The resulting score denoted the risk that sudden, extreme event might severely strain public finances, sharply increasing the sovereign's probability of default.

It mentioned that about 30 per cent of sovereign defaults since 1997 had been directly related to institutional and political factors, ranging from political instability to weak budget management and governance problems or to unwillingness to pay.