By Lee Wei Lian
KUALA LUMPUR, August 1 — Malaysia’s public finances are weak relative to those of its ‘A’ range peers and the country is now on par with more heavily indebted ‘A’ range sovereigns such as Italy, said Fitch Ratings today.
This comes after some economists said that the federal government’s debt, which nearly doubled since 2007 to RM421 billion, poses a fiscal risk to the country if not managed carefully as it impairs Malaysia’s resilience to economic shocks, which appear to be occurring with increasing frequency.
Fitch said that despite strong GDP growth, the deterioration in public debt ratios is affecting Malaysia’s credit profile and a lack of progress on fiscal reforms could lead to a ratings downgrade.
Fitch said that the rise in the federal government debt-to-GDP ratio and the limited broadening of the fiscal revenue base have pushed Malaysia’s debt-to-revenue ratio to 246 per cent in 2011, which is well above the ‘A’ and ‘BBB’ range medians of 137 per cent and 119 per cent respectively and is now on par with more heavily indebted ‘A’ range sovereigns such as Italy at 261 per cent and Israel at 180 per cent.
Italy is considered one of the countries at risk of a debt default and saw its borrowing costs soar to above seven per cent in November last year.
Other factors putting pressure on the country’s credit profile are low and energy-dependent revenues as well as structural weaknesses such as low average incomes.
“Fiscal slippage or a lack of progress on fiscal reforms to reverse the deterioration in public debt ratios, following the impending election, could prompt negative rating action,” said Fitch.
It added, however, that if the country demonstrated sustained political willingness to implement fiscal reforms that lead to a strengthening of the fiscal revenue base, improved budgetary flexibility and lower reliance on energy-linked revenues streams, it would be supportive of Malaysia’s ratings at their current level — which were affirmed at ‘A-’ and ‘A’ for Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) respectively.
The agency said that Malaysia’s public finances also exhibit structural weaknesses with general government revenues, which came up to 24 per cent of GDP in 2011, remaining well below the ‘A’ range median for general government revenues which was 33 per cent.
It also expressed concern that the share of petroleum-related revenues is high at 36 per cent of federal government revenues and that fiscal flexibility was crimped by fuel subsidies, which amounted to nine per cent of total expenditure last year.
Fitch said, however, that reforms were unlikely until after the general elections.
It also pointed out that a sharp increase in non-resident holdings of marketable domestically-issued medium- and long-term government debt grew to 41 per cent of foreign exchange reserves at end-June 2012 from 21 per cent at end-June 2008, which suggests that the capacity of the country’s external finances to absorb shocks may be weaker than in the past.
On the plus side, Fitch said that Malaysia’s stronger and less volatile growth, and slower and less volatile inflation compared with its ‘A’ category peers, supports its credit profile.
It also said that the government’s structural reform plan for the economy helped attract private-sector investment interest in 2011.
“However, given the political environment, Fitch believes implementation risk to the reform agenda remains material,” it said.
Other Malaysian strengths include strong foreign interest in Malaysian government securities and a large and liquid domestic debt capital market, which should be able to limit the impact on domestic financing costs in the event of a sharp reduction in foreign participation.
Fitch said that the broader public sector holds 33 per cent of marketable domestic government debt, further enhancing the stability of financing and funding flexibility.
Some economists earlier said that while Malaysia’s government debt — currently at about 54 per cent of gross domestic product (GDP), and the second highest in Asia — has not significantly impacted the country and its credit standing; yet, the volatile nature of global markets may manifest such a risk at any time, which could lead to higher borrowing costs for the country.
While the Najib administration has vowed not to let federal government obligations exceed 55 per cent of the country’s GDP, there is increasing worry that when government-backed loans or “contingent liabilities” are taken into account, the government’s total debt exposure rose to about 65 per cent of GDP last year.
The World Bank also said last November that Malaysia is too dependent on fossil fuel revenues, with its non-oil primary deficit having doubled in the last five years to almost 20 per cent of GDP.