Malaysia's credit rating outlook revised to stable

Malaysia's credit rating outlook revised to stable

KUALA LUMPUR (AFP): Standard and Poor's affirmed yesterday its
credit ratings for Malaysia's sovereign debt but revised its
outlook from positive to stable, citing the possibility of
government support for the financial system.

The New York-based agency said its "A-plus" foreign currency
rating and "AA-plus" local currency rating reflected Malaysia's
conservative economic management, modest government debt and a
political system that effectively balances the demands of the
country's multi-ethnic society.

Also affirmed was the "A-1-plus" rating for Malaysia's short-
term debt as well as the long-term ratings of the national oil
company Petroliam Nasional Bhd. (Petronas) which are identical to
the sovereign ratings. But the outlook for Petronas was also
revised from positive to stable.

"The change in the outlook reflects the fading prospects of an
upgrade in the ratings over the next one to three years.

"With the authorities under pressure to curb rapid credit
growth, Standard and Poor's believes that asset quality problems
likely will surface in the banking system that, in turn, could
weaken the government's financial position somewhat over the
period," a statement said.

"The strength of the sovereign's balance sheet -- including
official reserves of around US$22 billion and a net public
external creditor position equal to nine percent of exports -- is
such that its credit standing can withstand some deterioration in
banks' asset quality.

"However, if the decline in asset quality reached the point
where official support for the financial system is required, the
ratings could come under downward pressure.

"A worst-case scenario where government support amounted to
between eight percent and 23 percent of 1996 GDP (gross domestic
product), for example, would trigger a downgrade.

"Conversely, any prospect for higher ratings now depends on
whether financial sector stress can be managed in a manner that
limits the ultimate cost to the government," it said.

The agency noted that Malaysia's financial sector, like those
in neighboring countries, had expanded at a rapid rate this
decade, outstripping real economic growth by a wide margin.

"Output has increased by an impressive nine percent annually
while the rise in spending on construction, new plant and
machinery has been even more dramatic. But this pace of growth
looks increasingly hard to sustain.

"The economy is operating close to capacity, the current
account deficit is still above six percent of GDP, and the
ringgit's exchange rate is under downward pressure.

"More worrying, though, is the strength of domestic credit
demand that has fed the capital spending boom with investment
jumping over 45 percent of GDP from 32 percent since 1992, most
of which have been underwritten by the financial sector," the
agency said.

It said credit to the private sector and public enterprises --
a leading indicator of asset quality problems -- should exceed
170 percent of GDP this year, up sharply from 124 percent in
1994.

"Malaysia has entered a period of below-trend output growth,
with the risk that a sharper slowdown than generally anticipated
will occur," it said.

In view of rising interest rates, bearish sentiment towards
the ringgit and weak share prices, the agency said the forecast
consensus for a soft landing with eight percent GDP growth
through 1998 had turned more cautious.

"On current trends, Standard and Poor's expects real GDP
growth to slow to about seven percent in 1997 and to six percent
in 1998, from nearly nine percent in 1995-96, as the boom in
investment begins to falter," it said.

"Given the private sector's high leverage, even a falloff in
growth as moderate as this could have discomfiting implications
for financial sector asset quality. And that, in turn, could
rebound against the public sector, thanks to its sponsorship of a
number of big infrastructure projects, its equity stakes in some
banks and overall government support of the system."