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Malaysia: Rating agencies cautious over debt rise
PETALING JAYA: Rating agencies have raised their concerns over the elevated levels of Malaysia’s debt given its ratings but do acknowledge that efforts to be more transparent is a credit positive on the country’s profile.
Moody’s said government debt would probably edge up to around 51% of gross domestic product (GDP) over the next two years as a result of wider fiscal deficits and efforts to reduce the fiscal deficit to 3% of GDP by 2020.
It said a number of measures from Budget 2019, both implemented and planned, reflected the government’s goal to increase transparency and accountability of the public accounts.
“If sustained, these measures will be credit positive,” it said in a statement.
The rating agency said the government’s increase reliance on petroleum revenue weakened the country’s fiscal profile.
It said that following the replacement of goods and services tax with sales and service tax, the share of petroleum-related revenue has increased to 31% of total income from less than 16% in 2017.
“This compares with 34.6% in 2009-2014 when oil prices were higher than today and leaves revenue susceptible to oil price volatility, which weakens Malaysia’s fiscal profile.”
With government debt at 51% of GDP, those levels are higher than “A”-rated median forecast of 40.9% for 2018, emphasising fiscal constraints as a key credit challenge for Malaysia, said Moody’s.
“Based on government estimates that interest payments amounted to 13.1% of revenue in 2018, Malaysia’s debt affordability is among the weakest of A-rated sovereigns.
“While the budget projects a slight fall in this ratio to 12.6% due to the spike in revenue, which is primarily from one-off sources, we do not expect any further increase in debt affordability beyond next year,” it said.
Moody’s took note of the adoption of zero-based budgeting, targeting the immediate payment of tax refunds, reclassifying certain spending items, as well as reducing both recurrent and non-priority infrastructure expenditure.
“Further planned measures, notably implementing a Fiscal Responsibility Act and introducing accrual accounting by 2021, creating a Debt Management Office and tightening procurement policies, will support transparency and accountability,” it said.
Moody’s also acknowledged the RM1.1 trillion in liabilities as of June 2018, which is 74.5% of GDP.
“In addition to the direct government debt burden, these include ‘committed government guarantees’, amounting to 8.2% of GDP.
“This is the stock of guaranteed debt of companies – predominantly infrastructure-related – that requires regular financial support until the projects under construction generate sufficient revenue for them to service their debt independently.”
Non-financial public sector debt also includes RM38.3bil of 1Malaysia Development Bhd’s outstanding debt, and another 12.9% of GDP of liabilities from public-private partnership projects.
“Our estimates of the government’s debt burden are based on the direct debt obligations of the government, which we calculate at 50.6% in 2018,” it said.
Moody’s said its assessment of Malaysia’s fiscal strength previously considered the stock of government guarantees, which had risen to 18.1% of GDP as at end-June 2018 from 15.2% at the end of 2016, but viewed contingent liability risks from these guarantees to be limited.
“This was based on the assumption that the financial health of the companies that received government guarantees was generally strong, and the framework of granting guarantees rigorous.
“With the new government’s clarification that some of these entities, particularly those in the infrastructure sector, would require regular financial assistance at least during the construction phase or earlier stages of operation as projects they have undertaken become viable, the likelihood that some contingent liabilities materialise has risen.
“According to the government’s estimates of regular financial support that will be needed, this would add up to 10.5% of GDP to our estimate of government debt in 2018,” it said.
Fitch Ratings said in a separate statement that Malaysia’s public debt is already high and further increases over the medium term could have negative rating implications.
“We raised our estimate of end-2017 central government debt to 65.5% of GDP, from 50.8%, at the last review to reflect the government’s recognition that it will need to service a large share of explicitly guaranteed debt. The median public debt ratio for “A”-rated sovereigns is 50.6%,” it said.
It said the budget revised up the estimated central government deficit for 2018 to 3.7% of GDP, from a previous target of 2.8%, and Fitch expected the 2018 target to be met when it affirmed the sovereign rating at “A-” with a “stable” outlook in August.
“At that time, the government had expected that the net revenue loss from its repeal of the GST and higher spending from fuel subsidies would be offset by higher oil receipts and expenditure cutbacks.
“However, expenditure in the new budget is now higher than anticipated because of tax refunds and, more significantly, the inclusion of one-off expenditure items being brought on-budget, in part to enhance transparency,” it said.
Fitch said its expectation is still that debt ratios would fall in the next few years, provided that GDP growth remained broadly in line with the authorities’ revised outlook for growth of 4.9% for 2019 and 5% in 2020.
“However, the larger deficit targets suggest the pace of decline in the debt ratios could be slower and we believe risks to the fiscal outlook have risen.”
It said debt levels could fall should the sale of non-strategic public assets proceeded but there were also risks to debt containment from contingent liabilities related to public-private partnerships estimated at more than 10% of GDP, which may migrate to the sovereign balance sheet as the government continued to increase the transparency of public finances.
Fitch noted that while the debt profiles had increased, it was cognisant of efforts to raise governance standards and address corruption, particularly with respect to public finances.
“These intentions were prominent in the 11th Malaysia Plan presented last month, as well as in the budget.
“Improvements in governance could eventually support structural indicators in Malaysia’s sovereign credit profile, which are currently below the ‘A’ category median, but the benefits will take time to materialise,” it said.
Source: https://www.thestar.com.my/business/business-news/2018/11/09/rating-agencies-cautious-over-debt-rise/#Mm1Kq63hDjmzxE3w.99