CREDIT rating agency Fitch has downgraded Malaysia’s long-term foreign currency issuer default rating (IDR) to “BBB+” from “A-” on the back of lingering political uncertainty and substantial impact of Covid-19 on the economy.

A “BBB” rating indicates that expectations of default risk are currently low and the capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are likely to impair this capacity.

The credit rating agency said the Covid-19 crisis has weakened several of Malaysia’s key credit metrics.

“The authorities responded swiftly to the crisis, with material relief measures for affected individuals and businesses. Nevertheless, the impact on Malaysia’s economy has been substantial, and has added to Malaysia’s fiscal burden, which was already high relative to peers going into the health crisis,” it said in a note today.

“The government has secured passage of core legislation to implement relief measures, including the 2021 budget, but, in Fitch’s view, lingering political uncertainty following the change in government last March weighs on the policy outlook as well as prospects for further improvement in governance standards,” it added.

The agency also said economic activities have reduced in Malaysia just like other countries as a result of measures to contain the domestic spread of the coronavirus, weak investment and low tourism receipts due to the pandemic.

As such, Fitch has also projected for the country’s gross domestic product (GDP) to contract by 6.1% in 2020, before rebounding by 6.7% in 2021.

Economic growth will be driven by base effects, a revival of infrastructure projects and an ongoing recovery of exports of manufactured goods and commodities.

“These forecasts remain subject to uncertainty and depend on the near-term evolution of the pandemic, as illustrated by an increase in the number of daily cases since early October,” it said.

Fitch said the government expects to vaccinate 30% of the population next year, based on agreements so far with vaccine producers.

“We forecast growth of 4.6% in 2022, on expectation that Malaysia’s diversified economy will deliver strong medium-term growth,” it added.

The agency also expects fiscal deficit to remain higher than pre-pandemic levels, due to the continuation of support measures and political pressure for higher spending.

It also believes that Putrajaya’s target to narrow the fiscal deficit from 6% of GDP this year to 4.5% of GDP next year is achievable.

Government revenue is expected to remain low at 19.1% of GDP in 2020 with a heavy reliance on oil production from which 22% of the income is expected to come from. This includes dividends from Petronas.

The abolishment of the goods and services tax in 2018 has led the government to grapple with a low and concentrated revenue base as well as increasing dependence on dividends from government-linked companies, pending the introduction of new and more sustainable sources of revenue.

Malaysia’s debt is close to 400% of revenue, which is around three times the peer median, Fitch said.

“Government debt metrics have deteriorated due to the pandemic. Fitch expects general government debt to jump to 76% of GDP in 2020 from 65.2% of GDP in 2019.

“We expect the debt-GDP ratio to remain broadly stable after the pandemic recedes, given the likely fiscal deficit reduction, and low debt service costs, illustrated by an average 10-year yield of 2.7% in November,” it added.

Fitch added that the prospects for a further improvement in Malaysia’s governance are uncertain.

It added that the new government continued to implement some transparency-enhancing measures launched under the previous coalition, and corruption trials of former officials have continued, “but the government’s thin two-seat parliamentary majority implies persistent uncertainty about future policies”.

It said the deterioration in governance and continued political uncertainty could dampen investor sentiment and constrain economic growth.

Meanwhile, Finance Minister Tengku Zafrul Tengku Abdul Aziz expressed the government’s disappointment with the rating, particularly in light of the current exceptional circumstances when the Covid-19 pandemic is still unfolding.

He said Malaysia had already started to see the green shoots of economic recovery, attributed to the various stimulus packages implemented by the government since March 2020.

“By honing in on Malaysia’s fiscal position and political situation, Fitch’s decision does not give due justice and credit to our crisis response efforts and our strong economic fundamentals,” he said in a statement. – December 4, 2020.