Sin Chew Daily

Fitch Ratings, one of the world's top three credit rating agencies, was the first to downgrade Malaysia's long-term foreign currency issuer default rating (IDR) to "BBB+" from "A-" last week.

The other two major rating agencies, Moody's and Standard & Poor's will not follow suit soon, as they are expected to announced Malaysia's sovereign ratings only during the first half of next year.

Finance minister Tengku Zafrul Aziz said it was unfair for Fitch to downgrade the country's rating. He pointed out in a recent statement that the downward revision was primarily driven by the negative impact of COVID-19 on the country's fiscal position and the ongoing political situation here. He said the government had actually launched four stimulus packages worth RM305bn or about 20% of the country's GDP.

Fitch has revised the credit ratings of over a hundred countries this year, mostly downgrades. However, neighboring Singapore still keeps the highest "AAA" rating, while Taiwan and Hong Kong remain at "AA-" and China "A+".

After the downgrade, Malaysia will share the "BBB+" rating with Thailand, but still a notch higher than Indonesia's "BBB".

The objective of the ratings is to assess risks of credit default for a country or company. The lower the rating, the higher the likelihood of default.

If Malaysia's rating is consecutively downgraded, it will cause the international community and foreign investors to lose their faith in the country's economy. This will also mean that we will have to incur much higher cost of lending, and it may initiate negative chain reactions in the country's finances as well as the local equity and currency markets.

In 2016, Fitch, S&P ad Moody's concurrently slashed the credit ratings of Greece, making it difficult to borrow. As a result, the country was plunged into a deep debt crisis and eventually declared bankrupt. After these few years, Moody's still retains Greece's "B3" rating (16th out of 21 notches), while Moody's current rating for Malaysia is "A3" (7th out of 21 notches). It will definitely be a strong warning sign if both Moody's and S&P also downgrade our ratings early next year.

Juwai IQI chief economist Shan Saeed was disagreeable to Fitch downgrading Malaysia's sovereign rating. He said, "Their reports and outlooks are behind the curve. They come up with banal analyses which are not germane to the market, "Their reports and outlooks are behind the curve. They come up with banal analyses which are not germane to the market." Shan also highlighted the fact that the ringgit had appreciated 8.55% since March 23, and we all know that the appreciation of the ringgit was not due to the strength of the country's economy but the relative weakness of the greenback against global currencies during the past six months or so.

Tengku Zafrul went on to say that the country's fiscal deficit last year was at only 3.4% of the GDP, and the same is expected to remain at a low level this year. The finance minister said the country's economy would expand robustly by 6.5% to 7.5% next year, thanks to the stimulus packages introduced by the government.

Nonetheless, Fitch projected recently that Malaysia's average annual economic growth over the next ten years would be lower than 3.4%. Obviously, the outlook is not very rosy at all!

Although the government has come up with several enormous packages to stimulate the national economy, the real effects have yet to be felt and that probably explains why many people are not surprised by Fitch's action.

Instead of arguing that the three major rating agencies are all unreliable, perhaps we should put more effort to ensure economic recovery.

Bank Islam Malaysia chief economist Dr Mohd Afzanizam Abdul Rashid said of the stimulus packages, "If we do it right, the sovereign rating could be upgraded at some point in the future."

As a matter of fact, we do not have to be overly worried about the Fitch downgrade. The rating agency announced yesterday that despite progress in the development of vaccines against the coronavirus, it is unlikely for the agency to upgrade the ratings of major world economies over the next one year, while ratings of countries in South America, Africa and the Middle East will be downgraded.

Unless both Standard & Poor's and Moody's also downgrade our sovereign ratings, the downgrade by Fitch will only have momentary impact on Malaysia's equity, currency and bond markets.