I think this article is important to take note and to monitor thereon that the condition does not deteriorate further.
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By Lee Wei Lian
August 01, 2012
KUALA
LUMPUR, August 1 — Malaysia’s public finances are weak relative to
those of its ‘A’ range peers and the country is now on par with more
heavily indebted ‘A’ range sovereigns such as Italy, said Fitch Ratings
today.
This comes after some economists said that the federal government’s
debt, which nearly doubled since 2007 to RM421 billion, poses a fiscal
risk to the country if not managed carefully as it impairs Malaysia’s
resilience to economic shocks, which appear to be occurring with
increasing frequency.
Fitch said that despite strong GDP growth, the deterioration in
public debt ratios is affecting Malaysia’s credit profile and a lack of
progress on fiscal reforms could lead to a ratings downgrade.
Fitch said that the rise in the federal government debt-to-GDP ratio
and the limited broadening of the fiscal revenue base have pushed
Malaysia’s debt-to-revenue ratio to 246 per cent in 2011, which is well
above the ‘A’ and ‘BBB’ range medians of 137 per cent and 119 per cent
respectively and is now on par with more heavily indebted ‘A’ range
sovereigns such as Italy at 261 per cent and Israel at 180 per
cent.
Italy is considered one of the countries at risk of a debt default
and saw its borrowing costs soar to above seven per cent in November
last year.
Other factors putting pressure on the country’s credit profile are
low and energy-dependent revenues as well as structural weaknesses such
as low average incomes.
“Fiscal slippage or a lack of progress on fiscal reforms to reverse
the deterioration in public debt ratios, following the impending
election, could prompt negative rating action,” said Fitch.
It added, however, that if the country demonstrated sustained
political willingness to implement fiscal reforms that lead to a
strengthening of the fiscal revenue base, improved budgetary flexibility
and lower reliance on energy-linked revenues streams, it would be
supportive of Malaysia’s ratings at their current level — which were
affirmed at ‘A-’ and ‘A’ for Long-Term Foreign and Local Currency Issuer
Default Ratings (IDRs) respectively.
The agency said that Malaysia’s public finances also exhibit
structural weaknesses with general government revenues, which came up to
24 per cent of GDP in 2011, remaining well below the ‘A’ range median
for general government revenues which was 33 per cent.
It also expressed concern that the share of petroleum-related
revenues is high at 36 per cent of federal government revenues and that
fiscal flexibility was crimped by fuel subsidies, which amounted to nine
per cent of total expenditure last year.
Fitch said, however, that reforms were unlikely until after the general elections.
It also pointed out that a sharp increase in non-resident holdings of
marketable domestically-issued medium- and long-term government debt
grew to 41 per cent of foreign exchange reserves at end-June 2012 from
21 per cent at end-June 2008, which suggests that the capacity of the
country’s external finances to absorb shocks may be weaker than in the
past.
On the plus side, Fitch said that Malaysia’s stronger and less
volatile growth, and slower and less volatile inflation compared with
its ‘A’ category peers, supports its credit profile.
It also said that the government’s structural reform plan for the
economy helped attract private-sector investment interest in 2011.
“However, given the political environment, Fitch believes implementation risk to the reform agenda remains material,” it said.
Other Malaysian strengths include strong foreign interest in
Malaysian government securities and a large and liquid domestic debt
capital market, which should be able to limit the impact on domestic
financing costs in the event of a sharp reduction in foreign
participation.
Fitch said that the broader public sector holds 33 per cent of
marketable domestic government debt, further enhancing the stability of
financing and funding flexibility.
Some economists earlier said that while Malaysia’s government debt —
currently at about 54 per cent of gross domestic product (GDP), and the
second highest in Asia — has not significantly impacted the country and
its credit standing; yet, the volatile nature of global markets may
manifest such a risk at any time, which could lead to higher borrowing
costs for the country.
While the Najib administration has vowed not to let federal
government obligations exceed 55 per cent of the country’s GDP, there is
increasing worry that when government-backed loans or “contingent
liabilities” are taken into account, the government’s total debt
exposure rose to about 65 per cent of GDP last year.
The World Bank also said last November that Malaysia is too dependent
on fossil fuel revenues, with its non-oil primary deficit having
doubled in the last five years to almost 20 per cent of GDP.
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