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Fitch cuts Malaysia’s rating as budget deficit grows

Posted on: June 11, 2009

Reuters – Tuesday, June 9

KUALA LUMPUR, June 9 – Malaysia’s long-term local currency rating has been cut to A from A-plus by Fitch Ratings due to concerns over the growing budget deficit which it sees at 7.7 percent of gross domestic product this year.

Fitch on Tuesday changed its outlook for the debt to stable from negative and said that it was worried about both the deficit and revenue collection.

“By 2010, Malaysia’s general government primary deficit of minus 6.4 percent of gross domestic product will be amongst the worst in all Fitch-rated sovereigns after only Latvia, Bahrain, Ireland and Vietnam,” Fitch said.

Fitch kept the country’s long-term foreign currency rating unchanged at A-minus with a stable outlook.

Malaysia has been running steadily increasing budget deficits in recent years and overshot in 2008 announced new spending and loans worth 67 billion ringgit over two years to boost domestic demand at a time of falling exports due to the global economic downturn. [ID:nSP211849]

Fitch said that the ratio of Malaysia’s government revenues as a proportion of gross domestic product was just 21.6 percent, lower than the 10-year average of 35 percent for its peers and that ratio will worsen to 19 percent by 2010, the agency said.

Malaysia is highly dependent on oil, which accounts for 40 percent of government revenues and there is little chance that the country’s unpopular government will widen the revenue, Fitch said.

The next elections are due by 2013.

“Revenue reform measures are still a work-in-progress as plans to shift away from the “selective” sales and services tax to goods and services tax do not look forthcoming, while plans to monetise government assets through leasing, selling or developing government-owned prime land yield less than one percent of GDP worth of non-tax receipts,” said Fitch analyst Ai Ling Ngiam.

The Malaysian ringgit <MYR=> dropped on news of the downgrade, trading as low as 3.533 to the dollar compared with levels around 3.517 prior to the downgrade.

Analysts said that the ratings announcement, which came a few days after Standard & Poor’s left its “A-minus” rating intact, could have an impact on the central bank’s rate-setting policy.

“BNM on its part may have to factor in the impact of upside pressure on yields in assessing monetary policy as it moves forward,” said Vishnu Varathan, Economist at 4Cast in Singapore.

Bank Negara has cut rates by a cumulative 1.5 percentage points to 2 percent in its current easing cycle, but has left rates unchanged at its last two monthly meetings.


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