Fitch: Possible downgrade in Malaysia's credit rating

HONG KONG • Malaysia's deteriorating currency position - reflected in the ringgit's sharp depreciation, falling foreign exchange reserves and shrinking current account surplus - could force Fitch Ratings to restore the negative outlook attached to the country's credit rating, it said this week.

The warning comes a week after rival Moody's Investors Service said clouds were gathering over its positive outlook on Malaysia's A3 rating because of political risks, weak commodity prices and the threat posed by China's economic slowdown.

Fitch said recent political uncertainty was in line with Malaysia's relatively weak governance ranking.

On June 30, Fitch bumped the outlook on Malaysia's "A-" sovereign credit rating up to "stable" from "negative". The decision had been a "close call", said Mr Andrew Colquhoun, Fitch's Head of Asia-Pacific Sovereigns Rating.

"In June, we put more weight on the structural improvements, but the weights are not fixed. Continued erosion of external liquidity in the context of deteriorating investor risk appetite could eventually lead us to change our assessment again."

On July 3, a political storm erupted over a Wall Street Journal article on debt-laden state fund 1MDB stating that almost US$700 million (S$980 million) from 1MDB had been deposited in Prime Minister Najib Razak's bank account.

Mr Najib has denied any wrongdoing and the country's anti-graft agency has said the funds were a political donation.

Since then, however, the ringgit has lost 10 per cent of its value, plumbing levels unseen since the depths of the Asian financial crisis in the late 1990s. Yesterday, it gained some lost ground appreciating 0.6 per cent to 4.1710 a US dollar from a 17-year low of 4.2990 on Aug 26.

Malaysia's foreign currency reserves have dropped US$11 billion since the end of June to US$94.5 billion on Aug 14 - the lowest level for six years. The current account surplus has shrunk from a peak in 2008 to 7.6 billion ringgit in the second quarter this year, down from 10 billion in the previous quarter.

While there have been investor concerns around Malaysia's declining current account surplus, triggering portfolio outflows, the 1MDB scandal has amplified investor unease in a country with ongoing governance concerns.

Mr Colquhoun said 1MDB's debt did not create a major risk in itself, but there were dangers that controversy would distract policymakers.


A version of this article appeared in the print edition of The Straits Times on September 02, 2015, with the headline 'Fitch: Possible downgrade in Malaysia's credit rating'. Print Edition | Subscribe