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."