WHILE it is inevitable that Fitch Ratings decision to downgrade Malaysia’s sovereign credit rating (SCR) may dampen investor’s confidence and pile pressure on the financial markets, a more pertinent question is whether other prominent credit rating agencies will follow suit with a similar assessment.
Between the two, Maybank Kim Eng is more wary of S&P Global Ratings given its negative outlook on Malaysia.
In 2013 when Fitch put Malaysia on negative outlook, Moody’s Investors Service went against with a positive outlook, while S&P retained Malaysia’s outlook at stable.
“(Back then), all three agencies diverged,” observed analyst Winson Phoon. “This time, their views tilt slightly to the negative.”
His projection is that Moody’s may keep Malaysia at A3/stable in the next 6-12 months given its rating matrix tends to – and may continue to view – Malaysia’s metrics more favourably unless deteriorations occur in their assessments of growth dynamics, institutional settings and political risks of Malaysia (as these factors offset the weakness in fiscal pillar).
However, S&P rating risk remains an ongoing concern on grounds of its negative outlook.
“(Moreover), Malaysia’s debt metrics may continue to surpass S&P’s downward rating pressure indicators of ‘annual change in net general government debt >4%’ and ‘interest/revenue ratio >15%’ for both 2020 and 2021,” justified Phoon in a research note.
“We think it could be a matter of qualitative adjustment for S&P to extend Malaysia on its negative watch for another six to 12 months.”
Last Friday (Dec 4), Fitch Ratings downgraded Malaysia’s Long-Term Foreign-Currency Default Rating (IDR) from “A-” to “BBB+” while revising the country’s outlook from “negative” to “stable”
This marks Fitch’s first credit rating downgrade for Malaysia since 1998 and follows an earlier outlook revision from “A- stable” to “A- negative” in April.
While Fitch downgrade didn’t come as a complete surprise, Phoon expects it to still weigh on the Malaysian Government Securities (MGS) market amid cautious bond sentiment both domestically and globally.
“That said, we don’t expect large foreign sell-off a many investors don’t rely solely on rating to adjust their bond positions, and majority of the foreign holdings in ringgit bonds are considered to be stickier funds,” Phoon pointed out.
“In any case, Bank Negara Malaysia possesses ample capacity on direct bond purchases for market stabilisation if needed.”
From a bond strategy perspective, the research house noted that the MGS curve has re-priced higher since it revised its outlook to mildly bearish.
On the overall, Maybank Kim Eng maintained its MGS outlook at mildly bearish with an unchanged 10-year MGS yield target of 3.00% by end-1H 2021. – Dec 7, 2020
