Malaysian long-term forex rating downgraded

Malaysian long-term forex rating downgraded

KUALA LUMPUR (AFP): Credit rating agency Standard and Poor's
(S&P) yesterday downgraded Malaysia's long-term foreign currency
rating outlook from "stable" to "negative," dealing a fresh blow
to confidence in the economy.

The U.S.- based agency said the downgrade was due to the
authorities' "evident reluctance" so far to "curb rapid credit
growth that is financing an unsustainable boom in investment,"
now more than 40 percent of gross domestic product (GDP).

It also warned of the "likelihood that bank asset quality will
deteriorate significantly next year," estimating that total
credit to the private sector and public enterprises -- a leading
indicator of asset-quality problems -- will exceed 170 percent of
GDP in 1997.

This indicates a "very high private-sector leverage," it said.

S and P also cited the government's "ambivalent commitment to
orthodox economic policies in the wake of volatility in the
foreign exchange and share markets," citing Kuala Lumpur's
"flirtation" with curbs on stock and foreign exchange trading.

"While none of these measures are expected to be implemented,
they call into question the political commitment to conservative
fiscal management that in the past has helped underpin the
sovereign's credit standing," it added in a statement.

S and P affirmed Malaysia's "AA+" long-term and "A-1+" short-
term local currency ratings.

It said future ratings would hinge on effective steps,
starting with the 1998 budget proposal to be presented in
October, to slow excessive demand.

The agency also called for "renewed political support" for
market-oriented policies and "consistent recognition of the vital
role of foreign investment in underpinning the country's future
growth."

S and P urged "effective steps" by the government "to contain
its exposure to weakening asset quality in the financial system."

Prime Minister Mahathir Mohamad has alarmed foreign investors
with controversial measures to restrict share trading, which he
later lifted, and recently called for curbs on foreign currency
trading as well.

He has blamed foreign speculators for the Malaysian ringgit's
20-percent fall since July but his deputy and finance minister
Anwar Ibrahim has reassured the international banking community
that foreign exchange trading will not be restricted.