Risk experts losing faith in Malaysia

By:
Jeremy Weltman
Published on:

Further falls in the sovereign’s risk score signal the possibility of a credit rating downgrade.

ringgit Malaysia-R-600


Malaysia’s safety was questioned in Q2 2015 – its country risk score sliding to 61.51 from a maximum 100 points in Euromoney’s crowd-sourcing country risk survey.

Partial survey data for Q3 2015 – to be officially released in early October – show the score still sliding to 60.7 as of this week.

Malaysia is among those countries showing the largest increase in risk:

 

The borrower is falling steadily deeper into tier three, the middle of the five categories of creditworthiness synonymous with a BB+ to A- rating, falling one place since Q2 to 37th.

If the slide continues, Malaysia’s single-A credit ratings would be no longer justified.

What’s wrong?

The country is embroiled in a growing political scandal concerning prime minister Najib Razak’s involvement in the 1Malaysia Development Berhad (1MDB), the state development fund.

Accusations of corruption and mismanagement, prompting the Swiss authorities to conduct a money-laundering investigation, are emphasised by 1MDB amassing debts of $12 billion.

The problem has cast the spotlight over the nation’s ethnic and socio-economic divide, with ethnic-Malay supporters backing Najib and ethnic-Chinese protesters calling for him to resign as communal tensions threaten to spark wider violence.

This comes at a time when confidence in emerging markets (EMs) is paper-thin, with capital flight from Malaysia occurring due to its oil-sector vulnerabilities – up to a third of budget revenue is generated from oil production.

The ringgit is among the worst performing Asian currencies this year, having lost a fifth of its value.

Expert insight

The government is keen to paint a picture of normalcy, but as ECR expert and ABN Amro senior economist Arjen Van Dijkhuizen points out: "Compared to Q1, annual GDP growth in Q2 clearly slowed in commodity-producing Malaysia [to 4.9% year on year]."

The currency slide is bad for inflation, too, which has been steadily creeping higher in recent months to more than 3%.

Fiscal indicators, which have fallen in recent years, are at risk of going into reverse if the situation worsens, widening the deficit from last year’s 3.4% of GDP, with the debt burden climbing above its peak of 55% of GDP in 2013.

Malaysia scores lowly for government finances in Euromoney’s survey. Scores for the economic-GNP outlook and monetary policy/currency stability are down compared with year-earlier levels.

Scores for government payments – although remaining quite high – the regulatory and policy environment, and government stability have all been shaved.

ABN AMRO lists Malaysia as one of its top-six EMs at risk, noting its exposure to a China slowdown, its private debt ratio, and considerable short-term debt financing requirement testing reserves coverage, despite the modest current-account surplus.

Other experts are similarly becoming more wary.

Malaysia is not a high-risk prospect by any means, but it is gradually becoming more concerning for EM investors.

This article was originally published by ECR. To find out more, register for a free trial at  Euromoney Country Risk.