FAQ on Fitch’s Downgrade of Malaysia’s Credit Rating
Q1. Why was Malaysia’s credit rating downgraded by Fitch?
- On 4 December 2020, Fitch Ratings (Fitch) revised Malaysia’s credit rating from A-/ negative to BBB+ with stable outlook, citing that the rating revision was mainly due to the impact of the Covid-19 pandemic on Malaysia’s fiscal and government debt position.
- Since the onset of the Covid-19 pandemic, the Malaysian government has responded swiftly to the crisis by introducing several stimulus packages worth RM315 billion or approximately 20% of the Gross Domestic Product (GDP) to cushion the economic impact arising from the pandemic. This has weighed on Malaysia's fiscal and debt position.
- Aside from Fitch, Malaysia is still rated ‘A-’ by S&P Global Ratings (S&P) and ‘A3’ by Moody’s Investors Services (Moody’s).
Table 1: Malaysia’s Credit Rating
Rating Agency
|
Date of Last Rating Review/Action
|
Before Review
|
After Review
|
Rating
|
Outlook
|
Rating
|
Outlook
|
Fitch
|
04 Dec 2020
|
A-
|
Negative
|
BBB+
|
Stable
|
S&P
|
26 Jun 2020
|
A-
|
Stable
|
A-
|
Negative
|
Moody’s
|
16 Jan 2020
|
A3
|
Stable
|
A3
|
Stable
|
Source: Fitch, S&P and Moody’s
Q2. What’s the impact of Fitch’s rating downgrade on Malaysian bond market?
- Subsequent to the credit rating downgrade by Fitch on 4 December 2020, the impact on the domestic bond market as indicated by the benchmark 10-year Malaysia Government Securities (MGS) was muted as the yield eased by 1 basis point as shown in the Table 2 below.
Table 2: MGS Yield Movement (4 Dec 2020 to 24 Dec 2020)
MGS Tenure
|
4-Dec
|
24-Dec
|
Change
|
10-Year
|
2.70%
|
2.69%
|
-0.01%
|
Source: Bank Negara Malaysia
- This can be attributed to the following reasons:
- At BBB+ rating from Fitch, Malaysia remains an Investment Grade (IG) country. Hence, Malaysia remains relevant and investable for foreign investors investing in IG bonds.
- Malaysia's government bond yields remain attractive to foreign investors given the extremely low bond yields especially in the developed markets. In addition, Malaysia’s bond market is generally underpinned by stronger fundamentals as compared to other emerging markets. These factors are supportive of foreign investors’ participation in the Malaysian bond market as evidenced by the net foreign inflows of RM14.8 billion in the first 11 months of 2020 following net inflows of RM19.9 billion in 2019.
Table 3: Comparison of 10-Year Government Bond Yields as at 24 Dec 2020
Country
|
Yields
|
Indonesia
|
6.146%
|
China
|
3.282%
|
Malaysia
|
2.693%
|
South Korea
|
1.682%
|
Thailand
|
1.174%
|
Australia
|
0.995%
|
New Zealand
|
0.956%
|
US
|
0.926%
|
Singapore
|
0.843%
|
UK
|
0.254%
|
Japan
|
0.014%
|
EU
|
-0.532%*
|
*as at 23 Dec 2020
Source: Bank Negara Malaysia, European Central Bank and World Government Bonds
- The Ringgit has strengthened by 6.67% against the U.S. Dollar over the past 6 months on the back of the easing of the U.S. Dollar and recovery in crude oil prices. This has provided further support to the domestic bond market.
Table 4: Ringgit, U.S. Dollar, and WTI Crude Oil Movement (29 May 2020 to 24 Dec 2020)
Currency/Commodity
|
29-May
|
24-Dec
|
Change
|
USD/MYR
|
4.35
|
4.06
|
+6.67%
|
Crude Oil (USD/Bbl)
|
35.53
|
48.23
|
+35.74%
|
Source: Bank Negara Malaysia and Trading Economics
-
Since March 2020, rating agencies have downgraded the credit rating of numerous countries as government debt has rapidly increased due to measures undertaken to stimulate growth amid the pandemic. That said, most of the stimulus measures introduced are anticipated to be temporary, and are therefore not expected to have a permanent impact on the government finances in the medium- term. Furthermore, the Malaysian government is committed to preserving its fiscal discipline by reducing its fiscal deficit from a projected -6.0% of GDP for 2020 to an average target of -4.5% for 2021-2023.
-
Malaysia’s debt servicing ability is envisaged to remain sound backed by the government's ability to tap into domestic bond market for its funding needs given the deep and matured domestic bond market with presence of diverse and large local institutional investors that held 86% of the total debt securities of RM1.6 trillion in Malaysia.
Q3. What should investors in bond funds do?
- While the rating downgrade by Fitch has not negatively impacted the domestic bond market, investors are advised to adopt a long-term investment horizon to ride through any short-term fluctuations in bond prices.
- Moving forward, our bond funds will continue to adopt prudent bond selection while seeking to remain liquid to capitalise on investment opportunities in the bond market.
Disclaimer: This article is prepared solely for educational and awareness purposes and should not be construed as an offer or a solicitation of an offer to purchase or subscribe to products offered by Public Mutual Berhad. No representation or warranty is made by Public Mutual Berhad, nor is there acceptance of any responsibility or liability as to the accuracy, completeness or correctness of the information contained herein.