KUALA LUMPUR - Malaysia's downgrade by one of the world's top credit rating agencies has cast a light on standards of governance and political instability in the country where a third prime minister in as many years is facing a potential ouster.

Fitch's move to bring Malaysia's sovereign rating down a step from A- to BBB+ was a reversal of sorts for what was once a beacon of political stability in emerging Asia until its first-ever change of government in 2018.

The agency's commentary on its decision last Friday (Dec 4) sparked less concern at deteriorating fiscal metrics - "reduced economic activity" due to the coronavirus pandemic has afflicted "many countries", it said - compared to uncertainty in policymaking and "prospects for a further improvement in Malaysia's governance".

"The government's thin two-seat parliamentary majority implies persistent uncertainty about future policies," Fitch said, noting that after an improvement in 2019, Malaysia's World Bank governance score weakened this year to the 64th percentile, which is closer to BBB-rated sovereigns rather than those in A. "Deterioration in governance and continued political uncertainty could dampen investor sentiment, constraining economic growth."

Not only has the federal government faced instability since the May 2018 election, but many of Malaysia's 13 state administrations have also been rocked, with chief ministerships changing hands on at least seven occasions since then, including last week's ouster of Perak's Datuk Seri Faizal Azumu by his own Perikatan Nasional (PN) allies.

In an immediate response, Finance Minister Tengku Zafrul Aziz said "the government is disappointed with Fitch's rating outcome, particularly during these exceptional times as the Covid-19 pandemic is still unfolding" and accused the firm of not giving "due justice and credit to our crisis response efforts."

This has led to criticism that the Muhyiddin Yassin administration - which controls only 112 seats in the 220-strong Parliament - has missed the point of the downgrade.

Opposition Leader Anwar Ibrahim said last Saturday that the Finance Minister "failed to address the key areas of Fitch's concerns, namely political stability and governance".

"The so-called 'Sheraton Move' in February not only triggered political chaos, but also marked the beginning of a reversal of the institution reforms that Pakatan Harapan (PH) had been championing," he added, referring to the coup that installed PN.

Prime Minister Muhyiddin's nine-month reign has been widely viewed as a period which has seen political imperatives take precedence in decision-making, with more than nine-tenths of government MPs being appointed to the administration or state-controlled firms.

The recent "People Power Under Attack 2020" annual report by Civicus Monitor rated civil liberties in Malaysia as "obstructed", noting that "following the change of government in early March 2020, activists including students have faced judicial harassment from the police for their activism" and journalists have been harassed by the authorities.

Despite Datuk Seri Zafrul insisting that the political climate has not stopped "key legislations... in relation with the financing of Covid-19 measures, as well as... Budget 2021" from being passed, the latter Bill only secured a second reading last month after the government succumbed to pressure from its own backbenchers to extend loan moratoriums and broaden immediate withdrawals from statutory retirement savings.

The opposition and analysts have called on the government to table a confidence motion in Parliament to prove its majority and ease concerns over its stability.

"In normal circumstances a downgrade is not a justifiable reason to call for a vote of no confidence... but the context is... the parliamentary majority belonging to PN is very slim. It is not unreasonable for the opposition to raise this," said Ms Tricia Yeoh, chief executive of think tank IDEAS.

Ambank Research said on Monday that "the downgrade serves to highlight the need to further strengthen our reforms, transparency and inclusiveness".

"The downgrade would raise our borrowing cost. However, it now remains unclear if S&P and Moody's will follow suit," it added, referring to the rest of the "Big Three" rating firms.

S&P had in June changed its outlook on Malaysia from stable to negative, as "uncertainty regarding... further changes in government, or snap polls" undermine "the predictability of policymaking at a crucial juncture".

With the government projecting 2020 and 2021 deficits to be worth 6 and 5.4 per cent of the economy respectively, it will need to borrow more than RM170 billion (S$55.8 billion) in these two years to fund Covid-19 stimulus packages and development spending.

Financial experts believe increasing accountability in government and having a picture of how to pay off current spending - Budget 2021 is Malaysia's largest ever at RM322 billion - would improve the trajectory of Malaysia's credit rating.

Mr Jalil Rasheed, former chief executive of Permodalan Nasional Berhad, one of the largest state fund managers, called on policymakers to "start delinking business and politics and let it be run professionally. This will ensure a continuation should there be future political change."

"Transparent tracking of spending, and accountability reporting of what worked and didn't. This will help ensure that future spending is based on data and not shooting blank bullets. Understanding where is future revenue stream coming from? At some point all these pandemic spending money needs to be paid back to bring down debt level," he suggested.

Former finance minister Lim Guan Eng said on Monday the downgrade was "an urgent wake-up call for the PN government to carry out urgent political and economic structural reforms".

"Unless PN seeks to unite and work together to provide certainty, clarity and consistency to our political and economic policies, Malaysia's prospects will not be bright and the outlook foresees risks of future downgrades," he added.

Deputy Finance Minister Shahar Abdullah told Parliament on Monday that public coffers were impacted by lower oil prices of about US$40 per barrel instead of US$60 projected for 2020, and that bringing back the unpopular Goods and Services Tax on consumption - canned by the PH government in 2018 - was "not our current priority".

"We are implementing structural reforms to broaden revenue and improve governance. The Finance Minister is committed to a Fiscal Responsibility Act," he said.