U.S. agency downgrades Malaysian currency rating

U.S. agency downgrades Malaysian currency rating

KUALA LUMPUR (AFP): U.S. ratings agency Standard and Poor's on
yesterday lowered Malaysia's foreign and local currency credit
ratings in an action reflecting the country's cloudy economic
outlook.

"The downgrades reflect the economic stress of protracted
private-sector restructuring as corporations reduce their high
leverage and vulnerability to financial market volatility,"
Standard and Poor's said in a statement.

The New York-based credit assessor said it was cutting the
long-term foreign currency rating to A from A+ and the local
currency rating to AA from AA+.

The agency also lowered its short-term foreign currency rating
to A-1 from A-1+ but affirmed its A-1+ short-term local currency
rating.

It said credit to the private sector surged on average 29
percent per year during 1995 to 1997, propelling corporate and
household indebtedness to more than 170 percent of gross domestic
product this year from 125 percent in 1994.

A sharp deceleration in economic growth to below two percent
in 1998 will impair corporate and bank balance sheets
significantly, Standard and Poor's warned.

The downgrade also reflected an expected deterioration in
financial-system asset quality, it said.

Non-performing loans could more than double to over 15 percent
of total credit by end-1998, particularly as the property market,
comprising 25 percent of system loans, softens markedly, it said.

"Bank recapitalization requirements, in turn, could exceed 20
percent of 1997 GDP, imposing a sizable burden on government
finances and the economy at large," the US credit assessor said.

It, however, said that stress was unlikely to produce severe
external liquidity pressure akin to that in neighboring countries
given the low external indebtness of the Malaysian private
sector, estimated at only 20 percent of exports this year.

Standard and Poor's also attributed the downgrade to a lack of
transparency in the economy.

"Inadequate disclosure standards and linkages between the
political and business elites impeded timely recognition of
problems in the financial and corporate sectors, and the
implementation of market-based solutions to resolve them," it
said.

Standard and Poor's warned of a risk that the government will
assume private sector credit risks to the determent of both
public finances and investor confidence.

"Bank credit is likely to become excessively scarce and
expensive as bearish investor sentiment worsens, prolonging the
economic downturn beyond 1998," it said.