A stable credit rating outlook and estimation that the rainy days are over for the ringgit has upped the fortunes of Malaysia’s capital markets. The lift also got some help by the prospects of better political stability.
In response, the stock market closed 21.3 points higher at 1,727 points while the ringgit appreciated by 0.7% to 3.74 against the US dollar yesterday.
At one stage, the market was as high as 30 points up while the ringgit appreciated by as much as 1% as it rebounded from a 10-year low of 3.787 against the dollar on Monday.
Fitch, the rating agency that has since March hinted a possible downgrade in the sovereign debt ratings of Malaysia, corrected its outlook on the country’s debt ratings from negative to stable on Tuesday night.
Indeed this is great news because Fitch had put Malaysia on a “negative” watch for two years, and had just four months ago warned of a “more than 50%” chance of cutting the country’s credit rating.
Malaysia continues to be rated as A- by Fitch – one level above the lower three bands of the investment grade which range from BBB+ to BBB-.
If the rating dropped to the BBB band, the borrowing cost would have been higher for the country, something that the Government was adamant on avoiding when it made hard fiscal policies to improve the public finances. It would have placed a negative impact on the strength of the ringgit as well.
Actions taken include the reduction of the country’s subsidy bill largely by the gradual increase in fuel prices to be in par with market prices and the implementation of the Goods and Services Tax (GST), which broadens the tax base.
A currency strategist said the risk of the ringgit slumping further had lessened extensively with Fitch’s latest review on its outlook for Malaysia.
“I think there are some more legs for the ringgit to appreciate in the days ahead,” independent interest rate and foreign exchange strategist Dr. Suresh Kumar Ramanathan told The Star.
Nonetheless, some analysts cautioned that the stock market could face some volatility before it heads into an informal scenario next year.
“The Fitch report is very positive but there are still external uncertainties, for example, the potential interest rate hike in the United States,” Kenanga’s head of research Chan Ken Yew noted.
He said an interest rate hike would continue to strengthen the US dollar and weaken the ringgit.
“Until that hike takes place, people will continue speculating about the timing and the quantum of the US interest rate hike,” said Chan.
Even so, he felt that the stock market would end the year on a stronger note.
In its report, Fitch said that the reasonably strong real GDP growth rates and low inflation volatility supported the nation’s rating.
Malaysia’s five-year real GDP growth averaged 5.8% between 2010 and 2014.
Also on the positive side, postponement of the Umno polls by 18 months reduced political instability as well, said Fitch.
Prime Minister and party president Datuk Seri Najib Tun Razak said the delay allows Umno to concentrate on serving the people, consolidate, and help its Barisan Nasional partners get ready for the next general election.
In Fitch’s report, some key drivers for Malaysia’s positives included its improving national finances. By 2020, it expects Malaysia to have a balanced budget, without having to borrow to finance expenditure.
In addition, Fitch saw progress on the GST and fuel subsidy reform as supportive of the fiscal finances.
It also said that although the share of foreigners holding government securities was high and a weakness in Malaysia’s debt profile, local agencies like Employee Provident Fund could provide funding to support the absolute needs in the event of a sell-off.