China downgrades Malaysia's sovereign rating to negative:"financial system is weakening ....government corruption has fueled the disapprovals in the public... ossified political structure has intensified the existing conflict..".

Comment
Dagong is in essence China's answer to Western rating agencies.The choice of language is probably indicative of Chinese Government perceptions of Malaysia's politics and economy.

Dagong Downgrades the Sovereign Credit Rating Outlook of Malaysia to Negative

Time：2015-10-13 Source：dagong Editor： Print Font Size： Big Normal Small Click Rate：30

Dagong Global Credit Rating Co., Ltd.

October 13, 2015

Dagong Global Credit Rating Co., Ltd. (hereinafter referred to as “Dagong”) decides to downgrade the outlook to the sovereign credit ratings of Malaysia to negative, while maintaining the local and foreign currency sovereign credit ratings at A+. The debt repayment environment of Malaysia has witnessed deterioration to a certain extent. In addition to the decelerating economic growth in the short term, the rising financing cost and heightening external liquidity risks will pose a challenge to the government’s debt repayment capability and make it confronted with downward pressure.

The main reasons for downgrading the sovereign credit rating outlook of Malaysia are as follows:

1. The Barisan Nasional is facing increasingly strong headwinds to its ruling capacity, making the road to reform bumpy. In May 2015 the Malaysian government unveiled the 11th Malaysia Five Year Plan (2016-2020), which maps out plans and strategies to promote sustainable economic growth and improve social inclusion and justice. However,the Najib government is facing increasing pressure to its ruling capacity:the ossified political structure has intensified the existing conflicts; the opposition parties are reinforcing their influence; factional disputes within the United Malays National Organization become manifest; government corruption has fueled the disapprovals in the public. Accordingly, the policy promotion will be affected as well.

2. Shaken by the volatile fluctuations, the financial system is weakening in health. Under the influence of multiple negative factors in 2015, the accelerating outflow of international speculative capital triggered the sharp depreciation of the local currency. By end-September 2015, the Malaysian ringgit has depreciated by nearly 23.1%. Thanks to the longstanding huge current account surplus, the certain amount of external assets in the private sector has protected the foreign-currency payment of the financial system from serious impact. But as the real estate market is in huge bubbles, the towering household debt is getting increasingly risky, and the US interest rate hike is coming near, the financial conditions in Malaysia may deteriorate further, and the bubbles in the real estate and stock markets are more likely to pop.

3. The damped external demand and weakening domestic demand has muted economic growth. The credit squeeze and volatile financial market will dent consumption and investment, and the export growth will be dragged down by the falling commodity prices and Chinese economic slowdown. Hence we estimate the economic growth of Malaysia to slow down to 4.5% in 2015 and 4.7% in 2016 from the 6.0% in 2014. The deterrent household debt and asset bubbles will also dim the economic prospects.

4. The rising financing cost and compressed external liquidity threaten the government solvency. The Malaysian federal government has been under a heavy debt burden: the debt ratio is estimated to reach 55.0% in 2015 and 54.0% in 2016, and the financing demand to account for 9.1% and 9.0% of GDP respectively. Recently, the volatility in the financial market has ramped up the financing cost of the government which is facing increasing debt repayment pressure. Meanwhile, the capital outflow and precipitous currency depreciation have been draining Malaysia’s international reserves. While the gross external debt ratio reached 72.0%, the coverage to that decreased to 87.2% by the end of June, 2015. The external liquidity risk is heightening notably.

Dagong maintains the local and foreign currency sovereign credit ratings of Malaysia in that Malaysia’s economy is resilient with well-laid manufacturing industry and diversified export markets, and thus the current account surplus can be sustained in the medium-long term which will defend Malaysia against the rising external risks. The proactive fiscal consolidation will diminish the influence of declining oil revenue, so the primary fiscal deficit of the federal government is expected to narrow down from 2016, putting the government debt ratio on a slow decline in the medium term. Besides, the favorable debt structure and a proper size of assets will armor the government against potential risks. Therefore, Dagong maintains the local and foreign currency sovereign credit ratings of Malaysia at A+. Meanwhile, we will continue taking heed of the trigger factors for the outlook downgrading and take prompt actions when necessary.

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