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Standard & Poor’s Ratings Services has raised its long-term foreign currency sovereign credit rating on Malaysia to ‘A-‘ from ‘BBB+’. At the same time, Standard & Poor’s affirmed its short-term foreign currency rating of ‘A-2’, and long- and short-term local currency ratings of ‘A+/A-1’ on Malaysia. The outlook is stable.

“The upgrade reflects Malaysia’s better-than-expected fiscal performance, and the smooth leadership transition process,” says Standard & Poor’s credit analyst Chih Wai Liew, of the Asia-Pacific Sovereign Ratings Group. The general government deficit for 2003 is now expected at 4.4% of GDP, significantly lower than Standard & Poor’s earlier projection of 6.1% of GDP.

The government also demonstrated its commitment to fiscal consolidation by announcing a lower central government deficit target of 3.3% of GDP for 2004, even though it has to contest a general election before January 2005. “While the 2004 fiscal target appears overly optimistic, indeed we would not be surprised to see an outcome closer to 4.2% of GDP, the trend of narrowing deficits is expected to continue,” Liew adds. Standard & Poor’s expects the general government balance to move to a small surplus after 2007.

In line with Standard & Poor’s expectation, the leadership transition is progressing well, with little, if any disruption to Malaysia’s policy environment. Deputy Prime Minister Abdullah Ahmad Badawi is now scheduled to officially take over the premiership from Prime Minister Mahathir Mohamad on October 31, 2003. “Abdullah is expected largely to continue with the policy direction set under Mahathir’s administration,” says Liew. “Although the incoming premier is likely to adopt a more consultative approach to policy-making.”
Malaysia’s investment-grade ratings are supported by its significant external liquidity. With another year of current account surplus, central bank foreign reserves should exceed US$39bn by year-end 2003; the reserves would be sufficient to finance more than four and one-half months of imports, and be equivalent to 211% of the country’s external debt servicing requirements (including short-term external debt) in 2003. “With the current account expected to remain in surplus, Malaysia’s foreign reserves should continue to increase over the near-to-medium term,” adds Liew.