Why Fitch Ratings revised Malaysia’s outlook to negative


Why did Fitch Ratings revise Malaysia’s outlook to negative (though it reaffirmed long-term foreign and local currency issuer default ratings at ‘A-‘ and ‘A’, respectively)?

This is happening at a time when some of us are being distracted and diverted by racial and religious issues against a backdrop of what are expected to be closely contested Umno elections.

It almost seems like there is an attempt to split the 51 per cent of the population who voted for change using tried and tested divisive issues of the Old Politics. Don’t fall for these attempts.

The revised outlook for the country has also led to a change in the outlook to negative for Maybank, Export Import Bank, Petronas and Telekom Malaysia – due to their exposure to the government’s financial health.

Anyway, I have tried to summarise the factors leading to the negative outlook for Malaysia from the Fitch Ratings’ statement:

Weaker fiscal outlook and prospects for budgetary reform since GE13
– Federal government debt rose to 53.3 per cent of GDP by the end of 2012.
– General government debt increased to 4.7 per cent of GDP in 2012 due to a 19 per cent rise in public wages ahead of GE13. Thus difficult to achieve 3.0-3.5 per cent fiscal deficit by 2015.
– Malaysia’s fiscal (GG) revenue base is low at 24.7 per cent of GDP. One third of the revenue is from petroleum.

Contingent liabilities are rising
– Federal government-guarantees have risen to 15.2 per cent of GDP by end-2012, up from 9 per cent by end-2008.
– The non-financial public sector deficit soared to 10.2 per cent of GDP in 2012 from 3.5 per cent in 2011.
– Uncertainty over off-budget sheet liabilities.

Credit fundamentals weak
– “Its average income level of USD10,400 in 2012 was much lower than the ‘A’ median of USD18,600.
– “Overall level of development and standards of governance are weak.”
– Private sector debt reached 118% of GDP at end-2012, above the ‘A’ median 94%, and this could rise further by 2015.

On the positive side for the government:

– Federal government debt is mostly in local currency and has smooth maturity profile.
– Deep domestic capital markets
– The EPF channels savings to government. The EPF holds 28.8 per cent of Malaysian government securitis (March 2013).
– Strength in external finance (foreign asset and net forex creditor positions) provides cushion against growing exposure to non-resident investors.

Among other risk factors noted:
– ‘Further erosion of the current account surplus, particularly a “twin deficit” situation where failure to consolidate the budget is associated with the emergence of a sustained current account deficit.
– “A shock to interest rates or to employment sufficient to impair household debt servicing ability and put pressure on the banking system.”

This is the full Fitch Ratings press release:

Fitch Revises Malaysia’s Outlook to Negative; Affirms IDRs at ‘A-‘/’A’ Ratings Endorsement Policy
30 Jul 2013 4:58 AM (EDT) Fitch Ratings-Hong Kong-30 July 2013: Fitch Ratings has revised Malaysia’s Outlook to Negative from Stable. Its Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) have been affirmed at ‘A-‘ and ‘A’, respectively. The Short-Term Foreign Currency IDR has been affirmed at ‘F2’ and the Country Ceiling at ‘A’.


The revision of the Outlook to Negative reflects Fitch’s assessment that prospects for budgetary reform and fiscal consolidation to address weaknesses in the public finances have worsened since the government’s weak showing in the May 2013 general elections.

Malaysia’s public finances are its key rating weakness. Federal government (FG) debt rose to 53.3% of GDP at end-2012, up from 51.6% at end-2011 and 39.8% at end-2008. The general government (GG) budget deficit (Fitch basis) widened to 4.7% of GDP in 2012 from 3.8% in 2011, led by a 19% rise in spending on public wages in a pre-election year. Fitch believes it will be difficult for the government to achieve its interim 3% FG deficit target for 2015 without additional consolidation measures. Fitch sees risks even to the achievement of the agency’s 3.5% deficit projection, as this already factors in 1pp of GDP of spending cuts. This leaves Malaysia’s public finances more exposed to any future negative shock.

Contingent liabilities are rising. FG-guaranteed debt rose to 15.2% of GDP by end-2012 from 9% at end-2008 as state-owned enterprises (SoEs) participated in a government-led investment programme. The non-financial public sector deficit soared to 10.2% of GDP in 2012 from 3.5% in 2011. Data on consolidated indebtedness of SoEs are unavailable, which hinders analysis of the sovereign’s contingent liabilities.

Malaysia’s fiscal (GG) revenue base is low at 24.7% of GDP, against an ‘A’ range median of 32.8%. Fitch has long emphasised two key budgetary vulnerabilities: reliance on petroleum-derived revenues and the high and rising weight of subsidies in expenditure. Petroleum-derived revenues contributed 33.7% of federal revenues in 2012, broadly comparable with lower-rated Mexico (BBB+/Stable), another sovereign with a narrow and oil-dependent fiscal revenue base.

Notwithstanding these weaknesses, Fitch acknowledges strengths in the composition of Malaysia’s debt and in its funding base. FG debt is overwhelmingly denominated in local currency (97% at end-2012) and has a smooth maturity profile. Sovereign funding conditions benefit from deep domestic capital markets and from the role of the broader public sector in funnelling savings to the government. The state-run Employees’ Provident Fund held 28.8% of Malaysian government securities at end-March 2013. The rising role of non-resident investors points to growing exposure to global investor risk appetite, but Fitch views strengths in Malaysia’s external finances as a buffer against volatility. The impact of heightened market tensions on Malaysia’s government debt market since June has been mild compared with some regional and rated peers, so far.

Malaysia’s credit fundamentals are weak by ‘A’ range standards. Its average income level of USD10,400 in 2012 was closer to the ‘BBB’ range median of USD11,300 than the ‘A’ median of USD18,600. Its overall level of development and standards of governance are also considered weak for its ‘A-‘ rating. Fitch’s Banking System Indicator of ‘bbb’ suggests the standalone strength of Malaysian banks does not weigh on the credit profile. However, Malaysia’s high level of private sector leverage is a risk from a credit perspective. Credit to the private sector reached 118% of GDP at end-2012, above the ‘A’ median 94%. Fitch projects the divergence from the ‘A’ median will widen out to 2015.

Malaysia’s external finances remain its key sovereign credit and rating strength. The economy recorded a net external creditor position worth 30% of GDP at end-2012 against the ‘A’ range median creditor position of 17%. The sovereign’s own net foreign asset position of 21.3% of GDP and net FX creditor position of 44% were stronger than ‘A’ medians of 16.8% and 14.4% respectively. This is despite a decline in the current account surplus to a projected 3% of GDP in 2013 from double digits each year from 2003 to 2011 amid rising investment and a drop in the savings rate, led by the public sector.

Malaysia’s five-year average GDP growth rate of 4.3% (2009-2013) compares favourably with the ‘A’ median of 2.6% and the ‘BBB’ median of 2.7%. However, growth is being boosted by the government’s investment programme. Real gross domestic fixed capital formation (GFCF) grew 19.9% in 2012 against a five-year average of 5.6%pa over 2007-2011. GFCF contributed +4.4 percentage points to 2012’s 5.6% GDP growth.


The Negative Outlook reflects the following risk factors that may, individually or collectively, result in a downgrade of the ratings, most likely by one notch:

-Fiscal slippage relative to the government’s targets and lack of progress on structural budgetary reform; further accumulation of contingent or other off-balance-sheet liabilities
-Further erosion of the current account surplus, particularly a “twin deficit” situation where failure to consolidate the budget is associated with the emergence of a sustained current account deficit
-A shock to interest rates or to employment sufficient to impair household debt servicing ability and put pressure on the banking system
-Significantly slower GDP growth than Fitch’s current projection of about 5% per year out to 2015

Given the Negative Outlook, Fitch’s sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade. However, future developments that may, individually or collectively, lead to the Outlook being revised to Stable include:

-Faster progress on fiscal consolidation and budgetary reform than Fitch expects


-The ratings assume a global economic recovery in line with the agency’s June Global Economic Outlook. In particular, the ratings assume China avoids a slowdown to low single digit growth
-The ratings assume oil prices do not diverge significantly from the agency’s base-case projection of USD100/barrel on average over 2014-2015
-The ratings assume Malaysia continues to experience broad social and political stability

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najib manaukau

The bankrupt civil servants are only the beginning of their paymaster’s bankruptcy ! Plus it is also a reflection of what they and their paymaster are, the paymaster have not only failed to show them how to live within their means. On the contrary they are just learning from their paymaster how to spend with money they don’t have. The only easy way out of the shambles is for the civil servants is to declare bankruptcy and soon very soon their paymaster will join them. At this rates the entire nation’s of people too will join them and what a… Read more »

don anamalai

If the US economy continues along its current path of rather slow growth, the US government will stop its bond-buying program (i.e. stop printing money for quantitative easing and cheap borrowing) and the interest rates WILL rise in 2014. This will happen with little warning and will catch many by surprise.

Those who are highly geared with little liquidity, be careful! Else the bank will repossess your properties if you default on your loan payment due to higher interest!
Think twice if you intend to speculate on property at this point of time!


Thanks for the warning. I do not trust Bank Negara.


Are we gonna become like Zimbabwe soon? -,-!!!

don anamalai

Robert Mugabe has learnt from BN/EC on how to win election in Zimbabwe?

semuanya OK kot

One purpose of TPPA is to remove the “cushion against growing exposure to non-resident investors.” But different rules apply to the international bullies who are imposing this.

All the silly or insignificant matters blown up in the news is to distract us from the regression of the economy. It is almost entirely due to injustice, incompetence (including stupidity) and above all corruption.

don anamalai

Some 3,000 civil servants were bankrupted in 2011, as revealed by the civil service union, Cuepacs to The Malaysian Insider:


If Najib were to tighten budget, more civil servants will go bankrupt as they are so used to bonuses not tied to productivity or performance?


Worse will come when our country will go that way. Thats when more will be bankrupt

loke min xian

About time to remove deadwoods in the civil service to cut cost and improve productivity.

kh looi

Malaysia’s income inequality and illicit financial outflows ranks among the highest in the world and this is mainly due to a culture of high level corruption and wastage on mega projects.


Have we hit the rupiah / peso stage …

By now , the whole world knows what Malaysia’s problems are. It’s not rocket science. It’s an incompetent government run by a HP6 bloated civil service who were schooled at Bolehland’s … kampong standard education system. An economic disaster is all but a certainity. The only question is when. It will probably be during this 47% government’s tenure.

don anamalai

The consolation of ringgit hitting the rupiah stage is that many can proclaim to be millionaire! Syiok Sendiri & Boleh indded.


In short the low rating by Fitch means higher cost of borrowing. Exacerbated by our plunging ringgit. Since government still want to spend more and more, they will look at ways like – implement GST, reduce fuel and other subsidies, and maybe raise taxes. In the mean time EPF will continue to lend them cheaply.


So we can expect our currency becoming weaker and so import will be more costly and inflation will set in and our food bill and daily needs expenses will escalate. In the end,the majority of people will suffer. When people can’t make ends meet,they resort to crime and there will be more thefts,house breakin,robbery,extortion,kidnappings.
Sounds scary!


So call “localised” internal debt has become Malaysia and many country economy wet dreams. So called localised government debt is merely government tactics to borrow peoples money from the future, e.g. print excessive money and use inflation to devalue money value to wipe out the government debt. This method only works in certain extend : where there is solid increase of productivity to help curb the effect of inflation. However, such productivities are NOT GDP that include non-productive debt, financial manipulation. The strength of one currency is irrelevant once the country detach it and manipulate from behind. So it can… Read more »

najib manaukau

Whenever there is trouble the blame is first on BN but not Umno even though as I always maintained all the coalition partners in BN are only there just to endorse whatever Umno is doing. This is a good example of what I have said along. When are the coalition ‘partners’ going to wake up to the above situation ? Everyone in BN is always being blamed for any derogatory policies implemented but the ministry of finance has been run by someone from Umno since Tun Tan. This arrangement will never ever be changed unless there is a change in… Read more »

Gerakan K

This writer statement: “It almost seems like there is an attempt to split the 51 per cent of the population who voted for change using tried and tested divisive issues of the Old Politics. ”

Care to explain more or make it more clear ??? Give us exact examples or you just blah blah blah for syiok sendiri ???

kh looi

Msia’s guaranteed debtunder the Najib-administration had rose to nearly RM150 billion in 2012 from RM96.9 billion in 2010 ==> more BR1M more debts for your children/grandchildren to bear the burden 🙁

Gerakan K

Honestly, this writer is expecting too much. It is too complicated. It is too much spin. But the layman understand BR1M RM1200/RM600 easily. At least in pakatan state, pakatan should match or double BN offers. Otherwise, I expect Anwar will again win the opposition leader post in GE14 !!!

Andrew I

You mean after so much development, BR1M is all the layman understands?


The problem is they won’t say that its the corruption, waste and abuse of power that is the core reason for the problem..So their rating on give an excuse of UMNO/BN to abuse their power further by pushing for GST and removing subsidies..

don anamalai

Good explanation.

Astro Awani and TV3 ought to invite you as a panelist to provide layman explanation to this issue. Unfortunately they tend to get those local academicians to apple polish BN’s financial directives.

Andrew I

Cannot leh. You’d be outshining others.

don anamalai

Just found out that Facebook has removed Tun M’s ‘Chinese Dilemma’ posting, citing violation of community standards i.e. ‘unpleasant truth’ that promotes hate speech!

A true insult given we are now in the Ramadan month.

That Tun M’s article first appeared on NST, confirming that NST promotes hate speech!