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.