Malaysia has very low political risk despite 1MDB: Moody’s

KUALA LUMPUR — Moody’s Investor Service has rated Malaysia’s political risk in affecting the country’s creditworthiness as very low despite the 1 Malaysia Development Berhad (1MDB) controversy.

The rating agency also expected Barisan Nasional (BN) to remain in government until at least the next elections and said a United Malays National Organisation (UMNO)-led government, regardless of who is prime minister, should ensure stability in economic policy based on the five-year 11th Malaysia Plan released earlier this year.

“In Malaysia, we find that rising political challenges haven’t yet translated into increased fiscal risk, although the pace of budgetary tightening has slowed,” Moody’s said in a report on domestic political risk in South-east Asia released yesterday (Nov 12).

“Notwithstanding the events surrounding 1MDB, our assessment of domestic political risk in Malaysia remains at Very Low +, reflecting our expectation of de facto one party dominance and, consequently, policy continuity,” the rating agency added.

Moody’s Investor Service’s scores on political risk rank sovereigns from Very Low - to Very High +, based on the potential for a variety of events to affect a government’s credit profile.

The rating agency said the key question underpinning the positive outlook on its A3 rating for Malaysia — amid the 1MDB controversy, questions about the RM2.6 billion (S$843.4 million) donation deposited into Prime Minister Najib Razak’s personal accounts and calls for his resignation by prominent UMNO members — was whether the government had the political will to sustain the trend of fiscal consolidation initiated in 2010.

“The government has successfully charted these waters thus far. In the wake of losing its popular mandate in the 2013 elections, fiscal reform actually accelerated, with the government announcing its decision to implement the Goods and Services Tax during the 2014 budget announcement in October 2013. It also effectively removed fuel subsidies when global oil prices fell last year,” said Moody’s.

The rating agency noted that the 1MDB controversy posed a more direct and serious challenge to Malaysia’s political leadership than that posed by the weaker mandate in Election 2013, where BN lost the popular vote.

“Moreover, economic conditions are further weighing on sentiment. The terms-of-trade shock from lower commodity prices has contributed to slowing—but still healthy—GDP growth, a weaker ringgit, and faltering business and consumer confidence.

“The economy grew 5.3 per cent year on year in the first half of 2015, down from 6.0 per cent for the full year in 2014, while the ringgit has depreciated around 18 per cent year-to-date,” Moody’s said.

Moody’s pointed out that the slowing pace of budget-tightening as announced in Budget 2016 casts some doubt on Malaysia’s ability to achieve its target of a balanced budget by 2020, despite Putrajaya expressing its commitment to keep the fiscal deficit under control.

“Subsequently, the government announced further subsidy reductions on rice and highway tolls, unpopular decisions that further weigh on support for the prime minister and his administration.

“An escalation of political tensions could aggravate the government’s consolidation agenda, especially ahead of planned elections in 2018,” Moody’s added.

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