S&P affirms Malaysia's foreign and local currency ratings

Standard & Poor's Ratings Services (S&P) has affirmed the 'A-' long-term and 'A-2' short-term foreign currency sovereign credit ratings on Malaysia as well as the 'A' long-term and 'A-1' short-term ratings for the ringgit.

The outlook on the long-term ratings remains stable, S&P said in a statement, adding that it also affirmed the 'axAAA/axA-1+' ASEAN regional scale rating on Malaysia.

S&P said the sovereign credit ratings on Malaysia reflected the country's strong external position and considerable monetary flexibility, and that these strengths were weighed against Malaysia's less strong public finances.

In affirming the ratings, it said allegations in relation to 1Malaysia Development Bhd (1MDB) would not impede the ability of the executive branch to promote sustainable public finances and balanced economic growth.

"Similarly, we expect that the credibility of monetary policy and operational independence of Bank Negara Malaysia (BNM) will not diminish upon the retirement of long-standing Governor Dr. Zeti Akhtar Aziz in April," it said.

In the meantime, Malaysia's external position as a result of years of current account surpluses, is a key rating strength which S&P believes can withstand the slump in the oil and gas sector over the next two years.

"Our assumptions for Brent oil price per barrel (bbl) is US$40 for the remainder of 2016, US$45/bbl in 2017, and US$50/bbl thereafter," it said.

S&P's envisaged Malaysia's external indicators would remain broadly unchanged, given its projection that Malaysia's current account would remain in surplus.

For 2016, it said the depreciation of the ringgit should help the competitiveness of manufactured goods exports, offsetting some of the impact of weaker terms of trade for Malaysia's energy exports.

It also estimated the net general government debt to peak at about 49 per cent of gross domestic product (GDP) in 2015 but would decline modestly as growth remains buoyant.

It said Malaysia's general government fiscal position also carried contingent risks from its public enterprises and financial sector but "did not expect contingent liabilities of the weaker public enterprises to crystalise in a material manner on the central government balance sheet".

Although Malaysia's high household debt posed some risks, S&P believed that risks to the government were contained by the buffer of high banking sector capitalization and BNM's regulatory record.

"Our Bank Industry Country Risk Assessment for Malaysia is '4', with '1' being the strongest assessment and '10' the weakest," it said.

S&P's said that just over a quarter of Malaysia's ringgit-denominated government bonds were held by non-residents.

Although the foreign ownership could reduce, it said the country's sound budgeting, deep local capital market, floating exchange rate and 6.4 months of foreign exchange reserve coverage of current account payments, would attenuate the risks.

"We project Malaysia's GDP per capita to be just under US$10,000 as of the end of 2016," it said.

It also did not expect the weak energy prices to reduce real economic growth materially over the next 24 months, given that production of crude oil and liquefied natural gas accounted for only about 10 per cent of GDP.

"We project Malaysia's average annual growth in real GDP per capita to be 3.7 per cent over 2016-2019. Exports of manufactured goods and growth in private consumption and investment are likely to drive this expansion," it said.

S&P said the stable outlook was based on its expectation that Malaysia's strong external asset position and high monetary flexibility reduce the likelihood of a downgrade to less than one-in-three over the next 24 months.