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It is quite amusing that Malaysians themselves are very negative of their own economy when foreign rating agencies like Standard and Poor's and Fitch Ratings are very optimistic. This shows that the agencies are objective in their assessment of the fundamentals of economics rather than be biased by political propaganda.
STANDARD AND POOR'S (SnP) has affirmed Malaysia's "stable" outlook with an "A-" rating for long term and "A-2" rating for short term foreign currency sovereign credit ratings as reported by the New Straits Times recently on 28 July 2015. This outlook was concluded despite the political turmoil that is haunting the Najib administration particularly on issues surrounding 1MDB. One would conclude, prima facie, that the political turmoil is so pervasive that the overall confidence of Malaysia would have impair the ratings by SnP or even any other rating agencies. It appears that not only SnP, even Fitch Rating has concluded favourable a few weeks ago as confirmed by the Secretary General of the Ministry of Finance, Tan Sri Irwan Serigar. So, why would the outlook still be positive? It is because of the fundamentals of the economy.
Considerable monetary flexibility as weighted against moderate fiscal deficits of 3.9% and manageable Government debt burden is one of the factors. The policies that supported this are not impeded by the corruption allegations involving 1MDB. In fact, it will help Malaysia to withstand a slowdown in the oil and gas sector in years to come. To complement this, there is a need to boost the exports, for which, quite conveniently, the Ringgit has indeed weakened to help realise this. A weak Ringgit is not necessarily bad. A weak Ringgit is what we need. When Malaysian exports are cheaper (as a result of weak Ringgit), demand will grow to expand exports further especially for manufactured goods (that will partly offset the fall in revenues from oil). This is what it means by good fundamentals. One should realise that in any economic cycle, there must be a balancing act. This is the balancing act.
Bank Negara Malaysia has also operated effectively in controlling inflation that is now at 3% to 4%. Reliance on external debts have also been reduced given the active domestic bond market particularly the Sukuk market. General Government debt of 2.9% of Gross Domestic Product ("GDP") expected for 2015-2018 is a significant improvement from the 6% for the past period of 2009-2012. On the flip side, Malaysia is exposed to contingent risks associated with guarantees on debts and letters of support particularly the ones related to 1MDB for a total amount of RM11.4 billion. However, given the strong asset backing of RM52 billion covering power and realty assets, over the RM42 billion debts on the balance sheet of 1MDB, such contingent risk is remote from being materialised.
Malaysian public enterprises have diverse financial profiles with strong cash flows and considerable portion of liquid assets. To demonstrate confidence, the non-resident holders of Ringgit-denominated Malaysian Government Securities has risen sharply to 28%. With sound policy making, floating exchange rate and high foreign exchange reserves, SnP is confident that the foreign investors will maintain their investments in Malaysia. So far, the policies as presented in the Parliament for the 2016 Budget as well as the 11th Malaysia Plan has been favourable towards developmental expenditure. Ringgit is still floating albeit continuous weakening but a blessing in disguise to boost the export market. Foreign exchange reserves stood at 7.6 months of retained imports which is well above the global standard of 6 months. All these, coupled with strong large domestic institutional investors and local capital market, will drive Malaysia to better growth expected to be at 5.5% for the GDP for 2015.
It is quite amusing that Malaysians themselves are very negative of their own economy when foreign rating agencies like SnP and Fitch Ratings are very optimistic. This shows that the agencies are objective in their assessment of the fundamentals of economics rather than be biased by political propaganda. They acknowledge the strength of the Government policies and are confident with the commitment from the Government to drive macroeconomic reforms as evident by the implementation of non-popular initiatives such as the Goods and Services Tax ("GST") and the subsidy rationalisation.
Malaysia is exposed to contingent risks associated with guarantees on debts and letters of support particularly the ones related to 1MDB for a total amount of RM11.4 billion. However, given the strong asset backing of RM52 billion covering power and realty assets, over the RM42 billion debts on the balance sheet of 1MDB, such contingent risk is remote from being materialised.
* kopihangtuah
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