HEIGHTENED economic uncertainty from the rising COVID-19 cases along with political power jostling, which brought changes of government in 2020 – and more recently the appointment of the ninth Prime Minister (with slim majority support) – have raised concerns over the prospect of a future sovereign credit rating downgrade for Malaysia.
This is because such development could soon be reflected in the World Bank 2021 Worldwide Governance Indicators (WGI) slated to be released on Sept 24, according to Kenanga Research.
For now, major credit rating agencies have purportedly hinted that the pressure to downgrade is building up if Malaysia’s political instability deteriorates into policy uncertainty, which makes policymaking less predictable.
“A deterioration in WGI scores may increase the likelihood of rating downgrade among credit rating agencies, particularly Fitch and Moody’s, since the indicators will be used as input in their rating decisions,” opined head of economic research Wan Suhaimie Wan Mohd Saidie and team in a note on Malaysia’s sovereign credit rating outlook.
“Nonetheless, the prospect of sustainable economic recovery on the back of the gradual economic reopening and a potential resumption of fiscal consolidation in the medium term may provide some support from further rating downgrades.”
As Fitch Ratings was the first to downgrade Malaysia and has given the lowest rating at BBB+ (stable outlook), Kenanga Research reckoned that the most likely to make the first move to downgrade Malaysia’s sovereign debt rating would be S&P Global Ratings as it gave a negative outlook from stable on its A- rating in its latest review on Malaysia (June 27).
“Meanwhile, Moody’s Investors Service has not budged from its A3 rating with a stable outlook since January 2016,” observed the research house. “This means, Moody’s might have to revise its A3 rating to a negative outlook from stable before it decides to downgrade.”
However, it is equally difficult to predict the timeline or when the new rating announcement would likely be made, according to Kenanga Research.
“Nonetheless, given a weak fiscal balance sheet, prospect of slower growth amid rising COVID-19 cases on top of the political uncertainty, we reckon any revision to the rating could possibly be made as soon as in 4Q 2021,” the research house added. – Aug 25, 2021
