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BBB+. Malaysia’s report card according to Fitch.

Remember when your parents used to collect your report cards? All governments have something similar also. Three rating agencies (Fitch, S&P, and Moody) assign a grade according to the country’s ability to repay their borrowings and whether they are good to invest.

Fitch has graded BBB+ for Malaysia. Now, how should you understand this? What should you know from their ratings?

What does BBB+ mean?

It means that if you invest in Malaysian government bonds, their default risks are low. Fitch’s exact wording is ‘the capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity.’

What are these business or economic conditions that will impair this capacity?

There are mainly three that you should know of.

The Malaysian government is having difficulty paying its bills

Firstly, ‘fiscal flexibility is limited, with a large chunk of the budget allocated to salaries, pensions, debt servicing, subsidies and social assistance’, are the words from Fitch.

Now, in English, this is what it means. The government earns enough to cover a lot of its expenses and spending, but barely. In 2022 and 2023, it only has about RM1.7 billion and RM3.1 billion left over after covering all its operating expenditures.

FYI, operating expenditures are for the day-to-day running of the government such as the ones mentioned above.

That is why the government needs to borrow money to fund its investments in building roads, train tracks, power plants, and other big infrastructure things.

The government calls it ‘development expenditure’. They spent about RM72 billion and RM97 billion in 2022 and 2023 respectively. The RM1.7 billion and RM3.1 billion left over are not enough to fund these investments for sure.

Malaysia is still OK paying off its debts but it will become a danger

Secondly, how much did the government borrow then? And are they sustainable?

Fitch had this to say, ‘government debt remains high versus Malaysia’s peers, general government debt to GDP is at 76% compared to the median of the BBB group of companies at 55% of GDP’.

In my opinion, this is a very poor way to talk about whether the debt is sustainable. You might think 76% is high because you compare it to the median of 55%.

But then, you have to consider that other advanced economies like the U.S. and Japan have more than 100%. So, you mean the U.S. and Japan are much worse? Wrong.

A more accurate way would be to look at the debt service ratio of Malaysia, i.e. how much of Malaysia’s government revenue is channelled to service its interests from the loans.

In 2023, the debt service ratio for Malaysia stood at 15.2% which is higher than 2023’s of 14.0%. But 2021 was the highest ever at 16.3%.

So, based on this, Malaysia seems to be doing ok. But of course, dangers are still there. The government projects that the 2024 debt service ratio will hit 16.2%, close to 2021’s level.

Hence, the government is trying to reduce its spending on subsidies from 2024 onwards but that might not be as easy as it sounds. This brings us to the third point.

Malaysia has problems implementing reforms

Thirdly, Fitch said, ‘Political considerations may hinder long-term policymaking and reform implementation’.

Now, how should you make of this?

The hint lies in what Fitch said (albeit they are a bit cryptic), ‘we expect fiscal reforms, such as the introduction of broad-based consumption taxes, to be politically challenging in the near term, as the government balances interests within the ruling coalition and garners support from voters.’

Board-based consumption taxes mean Goods and Services Tax (GST). Oh no, that three-letter word would certainly not go down well. There were murmurs from politicians to re-implement this but that will be political suicide.

So, what did the government do then?

Instead of trying to increase taxes, it’s trying to reduce its spending. Makes sense. Better for the government to buck up rather than tax us for their wasteful spending.

But oh no, they are reducing fuel subsidies. Diesel prices have already increased by 56% to RM3.35 per litre (except in Sabah and Sarawak) just recently.

Next on the chopping block? RON95 subsidy.

Fu — I mean ok, fine. I get that fuel subsidy is very expensive for Malaysia, and a lot of it has gone to waste (Lots of smuggling and also, the poor use way less fuel compared to richer people). I agree in principle with the move away from a full one.

But much will hinge on whether the ‘cash assistance’ programs done by the government will be effective. It is the reason why we were all asked to fill up the PADU database.

My view is I am sceptical. Sceptical of the ‘targeted’ nature of the subsidies. I have listed them before in this article here. The bottom line is that implementing targeted subsidies requires more money to build up the infrastructure and identify the people who need them.

If the government wants to channel RM10 to a family that needs it, it would probably need to spend close to RM5 to RM7 in administration expenses to do it. In the end, only RM3 reaches that family.

If that is the case, give me back the subsidy.

What can you do with this information?

Two things you can take away from Fitch’s rating.

Malaysian market reaction after Fitch announced its rating of BBB+

Fitch rating will normally affect the whole Malaysian market. So, it’s best to look at the FBMKLCI reaction to this news. Fitch didn’t change their rating of BBB+, instead, they just maintained it. And the market took it as positive news. The FBMKLCI rose by 0.3% to 1,590 on 28 June 2024 when it was announced.

If you have invested in an exchange-traded fund on KLCI, this will be good news as it will have risen in line with the market.

Credit ratings will affect your bond investments

If you are a holder of Malaysian government bonds, credit ratings determine the price. The better the credit rating, the higher the price and vice versa. So, how do Fitch ratings affect it?

The fact that it wasn’t downgraded is good news. Malaysia’s 10-year government bond price increased by 0.1% to 106.1 on 28 June 2024.