'Malaysia at risk of multi-notch downgrade'
Published on: Tuesday, July 28, 2015
Selangor: BNP Paribas has cautioned investors that Malaysia is at risk of a multi-notch downgrade in its sovereign credit rating, despite a recent upgrade by Fitch Ratings, opining that the review overlooked its sovereign credit rating compared with its peers, where it falls below par.In its Asia Desknote, BNP Paribas said Malaysia's public finance performance trends against rating peer medians are a particular concern as its analysis suggests that Malaysia fell further behind the 'A' range on key indicators such as debt-to-revenues, since Fitch initially placed the rating on a negative outlook in mid-2013.At the end of June, Fitch affirmed its 'A-' on Malaysia's sovereign rating and reverted its outlook to stable from negative.
ADVERTISEMENT
"The persistence of this relative deterioration suggests that Malaysia's sovereign rating should have been downgraded regardless of the reforms implemented. That it wasn't, speaks to a potentially more concerning state of affairs: sovereign rating committees are reluctant to take negative rating actions."IMF (International Monetary Fund) research highlights that such reluctance is not a new trend. After investigating the history of sovereign rating actions, they found that, in their effort to rate 'through the cycle', the agencies have repeatedly given sovereigns the benefit of the doubt," BNP Paribas said.BNP Paribas said Malaysia's risk of a multi-notch downgrade is especially high when there has been a marked deterioration in the external finances. With public finance and structural components of the credit profile weak relative to that of its peers, external finances have historically been the core credit strength underpinning Malaysia's standing as an 'A' range sovereign.Fitch's latest rating report, however, indicates that external finances are no longer a credit strength. Instead, it was replaced by hope that fiscal reform leads to improved macroeconomic policy which, BNP Paribas said, unfortunately now lies more with Bank Negara Malaysia (BNM) than with the Finance Ministry.
ADVERTISEMENT
BNP Paribas explained that Fitch's approach is borne from a desire to give sufficient time for remedial policy action to bear fruit. As a result, arguments to downgrade must sometimes show rating committees indication that a crisis is imminent, rather than highlight a relative fundamental deterioration."This creates an unnecessarily high hurdle for actions which, as the European sovereign debt crisis showed, when a crisis is finally recognised may lead to multi-notch downgrades. In turn, it has perpetuated the view that rating agencies are the last to know when a sovereign is in trouble," BNP Paribas said in its note.
ADVERTISEMENT
It said deterioration in external liquidity metrics, such as short-term external debt coverage and international liquidity ratio, is central to this assessment.Lower global oil prices and consistently negative political news flow have aggravated balance of payments deterioration, producing an escalation in ringgit volatility and depreciation pressure.BNM's response to currency strains has been to deplete foreign exchange reserves, leading to a weakening of external solvency. BNP Paribas estimates BNM's defence of its MYR Nominal Effective Exchange Rate peg has cost US$40 billion since April 2013.These actions look to have escalated as dollar/ringgit approached its post-Asian Financial Crisis peg level of 3.80 (which BNP Paribas foreign exchange strategist estimates is its fundamental fair value). So much so that reserves could soon dip below US$100 billion for the first time since 2010, it said.Stay up-to-date by following Daily Express’s Telegram channel.
Daily Express Malaysia
