Moody's: Malaysia's policy reforms support A3 rating, despite weaker growth and external pressures

Moody's says that the Government of Malaysia's (A3 stable) implementation of major policy reforms has mitigated the negative impact of lower oil prices on the government's fiscal position. Nevertheless, external pressures--including increased capital flow volatility and consequent exchange rate depreciation--have led to a deterioration in Malaysia's growth and external metrics that have informed the earlier decision to revise the rating outlook to stable from positive.

Moody's conclusions were contained in its credit analysis on Malaysia, and which examines the sovereign in four categories: economic strength, which is assessed as "very high (-)"; institutional strength "high (+)"; fiscal strength "high (-)"; and susceptibility to event risk "moderate (-)". These are the four main analytical factors in Moody's Sovereign Bond Rating Methodology.

The report constitutes an annual update to investors and is not a rating action. It also follows Moody's decision on 11 January to affirm Malaysia's A3 government bond rating and revise the rating outlook.

As part of that decision, Moody's also considered increased macro-financial risks posed by high systemwide leverage, especially in the household sector.

While Moody's notes the government's proactive fiscal management in demonstrating the commitment to narrower fiscal deficits, the public debt burden and debt affordability has not seen material improvement. At the same time, contingent risks to the government's balance sheet from the non-financial public sector or the banking system are manageable.