A deterioration in the current account surplus exposes Malaysia to volatility in investor sentiment and Fitch would review the country in the second quarter, Andrew Colquhoun, the company’s head of Asia-Pacific sovereign ratings, said in an interview on Wednesday in Singapore.
The nation is currently rated A-, the fourth-lowest investment grade, and two levels above BBB. There’s more than a 50% likelihood of a rating cut, Colquhoun said.
One-month non-deliverable forwards for the ringgit declined 0.19% to 3.7115 a US dollar as at 11.53am in Kuala Lumpur, after earlier rising as much as 0.17%. The spot rate dropped 0.1% to 3.7005 after gaining 0.24%.
“The Fitch comments saw the ringgit giving up some of its gains,” said Khoon Goh, a Singapore-based strategist at Australia and New Zealand Banking Group Ltd. “There is a risk of a rating cut, but it’s hard to say whether this has been priced in or not.”
Plunging crude prices prompted the government to raise this year’s fiscal deficit target and cut the economic growth forecast as a drop in earnings hurts Asia’s only major oil exporter.
The ringgit fell 13% against the US dollar in the past six months, Asia’s biggest loss, and sentiment has been worsened by concern that state investment company 1Malaysia Development Bhd (1MDB) will struggle to meets its debt obligations.
It repaid a US$563 million (RM2.1 billion) overdue loan in February, after rescheduling the payment, and the government this month provided the company with a US$257 million standby credit facility.
A BBB rating might be more suitable for Malaysia due to its level of income and development, and the nation scores weaker in terms of governance among its peers, Fitch’s Colquhoun said.
1MDB is a country demonstration of what weak governance means, he said. Fitch had said in January that 1MDB was a “contingent liability” on the sovereign.
Fitch said in the Jan 20 statement that it’s “more likely than not” to downgrade Malaysia’s rating, with the nation’s dependence on commodities a key credit weakness.
Brent crude has more than halved since June to US$53.23 a barrel.
Malaysia’s current account surplus shrank to RM6.1 billion in the fourth quarter, the least since June 2013. Exports contracted in January for only the second time since 2013 and the government raised its 2015 fiscal deficit target to 3.2% of gross domestic product from 3%.
Malaysia is planning to tap the global bond market with an issue of as much US$2 billion of Islamic debt and has hired banks to arrange the sale.
The yield on the nation’s existing US dollar-denominated sukuk due in 2021 rose two basis points Wednesday to 3.08%. 10-year local-currency notes were steady at 3.93%, data compiled by Bloomberg show.
The cost of insuring Malaysia’s sovereign debt for five years using credit default swaps has dropped to 138 from a four-month high of 151 in January, CMA prices show. That’s up from the five-year average of 101.
– by Liau Y-Sing