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S&P's Rating outlook upgrade a boost to investors’ confidence in Malaysia's creditworthiness, says an economist

28/06/2022 03:23 PM

By Nurul Hanis Izmir

 KUALA LUMPUR, June 28 (Bernama) -- The S&P Global Ratings’ upgrade of Malaysia’s sovereign rating outlook to stable from negative is a boost to investors’ confidence in the country’s creditworthiness and ability to navigate the fiscal challenges posed by the prolonged pandemic, an economist said.

Sunway University economics professor Yeah Kim Leng said the influential international credit rating agency also signalled the country’s stable growth and fiscal performance over the near term.

“It is noteworthy that the agency remains sanguine of performance of the Malaysian economy this year which it expects to expand at 6.1 per cent despite the gathering headwinds facing the global economy, particularly the two largest economies, US and China,” he told Bernama.

Meanwhile, Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said factors such as net energy exporter, a major producer of crude palm oil as well as the easing of COVID-19 restrictions would be the key drivers for growth and the prevailing rating.

“The way I see it, it is a vote of confidence from the rating agencies for our government finances. This essentially will open the fiscal space as the government needs to ensure economic growth prospects will remain intact.

“Laying out a roadmap for fiscal consolidation would also help to build the credibility and confidence,” he said.

He said such endeavor, however, has to be communicated to the general public so there would be a total buy-in from them.

“In a way, this could also help stabilise our ringgit,” he said.

Separately, RHB group chief economist and head, market research, Dr Sailesh K Jha said the S&P outlook upgrade implied that some fiscal reforms could be coming.

“In our view, the surprise S&P upgrade to Malaysia’s sovereign outlook to stable from negative and affirmation of its long-term foreign currency debt rating at A-, implies that fiscal reforms could be coming within the next 12 months.

“The near-term implications for financial markets are neutral since it remains to be seen what these fiscal reforms will be and the timing of implementation of these policies,” he said in a research note.

He said although it is too early to tell, the balance of risks is tilted towards the Goods and Services Tax (GST) not being included in the initial announcement of Budget 2023 but could be announced in March 2023 with implementation towards the latter part of 2023 or early 2024.

“The GST rates could be in the low single digits and could potentially be implemented in a tiered manner with luxury goods being one component and normal goods being another component.

“Alternatively, if GST reforms aren’t possible in the foreseeable future, corporate taxes could be raised as part of Budget 2023,” he said.

On Budget 2022, he said there are risks that the Petronas dividend payments to the government could go up and royalty payments to state governments could be relatively less than programmed.

Additionally, he said development expenditures in 2022 could be much lower than the programmed RM75.6 billion.

“These measures could be in the cards to partially offset the Ministry of Finance (MoF) guidance of the 2022 total subsidy bill potentially hitting around RM77 billion versus the programmed RM17.4 billion.

“The intent of the government, in our view, is to try to achieve as close to the 2022 fiscal deficit target of six per cent of gross domestic product as possible, if not exactly,” he added.

On Monday, the S&P Global Ratings projected Malaysia’s economy to grow at 6.1 per cent in 2022 and five per cent in 2023 supported by strong exports, high commodity prices and domestic demand following the reopening of the economy.

Concurrently, the rating agency also affirmed the “A-” long-term and “A -2” short-term foreign currency sovereign credit ratings as well as Malaysia’s “A” long-term and “A-1” short-term local currency ratings.

At 9 am, the ringgit rose to 4.3960/4000 against the greenback from 4.4030/4060 at 6 pm on Monday as risk appetite for the local currency strengthened following the positive revision of Malaysia’s long-term sovereign credit ratings outlook by S&P.


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