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.