Malaysia catches the attention of international ratings agencies again. Both Moody’s Investors Service Inc and Fitch Ratings issued credit reports yesterday highlighting that political uncertainties could erode economic fundamentals.
The latest reports by the duo swung share prices on Bursa Malaysia, besides dampening regional sentiment. The FBM KLCI leaped to a high of 1,660.22 points in the first trading hour, soaring 2.94% or 47.48 points from last Friday’s close. But strong selling emerged soon, pulling down the index to a low of 1,603.25. It closed at 1,609.21, down 3.53 points or 0.22%.
Moody’s, which has an “A3” positive rating on Malaysia, said the continued political uncertainty could dampen business sentiment and economic growth. The agency forecasts gross domestic product growth to slow to 4.8% in 2015 from 6% in 2014.
It noted that the weekend protests reflect the ongoing political uncertainty in the country, which it said could impact sentiment and capital inflows.
“This, in turn, is likely to chip away at reserves and the growth outlook, both of which have been buffering against market volatility but have trended downwards this year, a credit negative,” it said in the report.
The credit ratings agency said the country’s large reserves and robust growth outlook, along with exchange rate flexibility and fiscal consolidation efforts, had offset the negative impact of market volatility on the sovereign credit profile.
However, if business confidence and capital inflows continue to weaken, Moody’s opined that this would gradually erode the support that reserves and growth have offered thus far.
“The pace of economic expansion will moderate as the GST (goods and services tax) and lacklustre sentiment curb consumption and investment, and lower oil prices push down liquefied natural gas prices with a lag,” said Moody’s.
Meanwhile, Fitch Ratings, which has recently revised Malaysia’s outlook to “stable” from “negative”, pointed out that the large demonstrations highlight the political volatility in Malaysia, but added that weak governance had already been factored in its “A3” sovereign rating on the country.
“The recent political uncertainty in Malaysia falls in line with the country’s relatively weak governance ranking. World Bank governance indicators place it in the 62nd percentile, well below the median for ‘A’ rated countries, which is around the 75th percentile.
“Malaysia scores particularly poorly on the ‘voice and accountability’ and ‘political stability’ indicators within the governance rankings,” said Fitch.
However, the agency said weakening external accounts are a more pressing credit risk for Malaysia, noting the fall in foreign reserves to US$95 billion (RM395.2 billion) in mid-August and the ringgit’s weakness against the US dollar.
The agency noted reforms such as the introduction of the GST and the abolishment of fuel subsidies, but said further that fiscal measures are likely needed to achieve the government’s long-term plan for a balanced budget by 2020.
“It would be [a] credit negative for Malaysia should the political volatility result in the government backtracking on these reforms. In the longer term, Fitch will continue to assess the credit impact — both positive and negative — of these economic policies,” said the agency.
Over at Bursa, Danny Wong, chief executive officer of Areca Capital Sdn Bhd, said the KLCI was dragged down by declines in banking stocks, and said the index’s fall was in line with the lower close in US, European and Asian markets.
“The market was up earlier in the day following the Bersih  rally over the weekend, but there was some speculative selling of some of the banking stocks, which dragged down the index,” he said.
It was noted that banking stocks such as CIMB Group Holdings Bhd, Hong Leong Financial Group Bhd and RHB Capital Bhd posted declines during yesterday’s session.
“Although the index found its bottom last week, the KLCI is still seen to be unstable. The direction of the KLCI, going forward, will still depend on the direction of oil prices and the ringgit,” he said.
Wong sees the immediate support level for the index at the 1,560 points level.
In Asia, markets were broadly down, with Japan’s Nikkei 225 declining 3.84% to 18,165.69, China’s Shanghai Composite Index falling 1.23% to 3,166.62, Hong Kong’s Hang Seng Index decreasing 2.24% to 21,185.43, and South Korea’s Kospi settling 1.4% lower at 1,914.23.
In Southeast Asia, Indonesia’s Jakarta Composite Index fell 2.15% to 4,412.46; Singapore’s Straits Times Index lost 1.32% to 2,882.77; and Thailand’s SET declined 1.56% to 891.51. – digitaledge Daily, September 2, 2015.