Friday, August 2, 2013

Fitch’s downgrade a ‘warning salvo’, RHB Research tells Putrajaya

Ringgit notes are seen among other currency notes in this file photo illustration. The ringgit sunk to a three-year low after the Fitch report was released on August 1, 2013. — Reuters picRinggit notes are seen among other currency notes in this file photo illustration. The ringgit sunk to a three-year low after the Fitch report was released on August 1, 2013. — Reuters picKUALA LUMPUR, Aug 2 — RHB Research Institute (RHBRI) sounded warning bells on Malaysia’s finances today, telling the Najib administration that Fitch Ratings’ downgrade of the country’s credit outlook from “Stable” to “Negative” may just be the “straw that breaks the camel’s back”.
RHBRI’s cautionary note comes following the global ratings agency’s recent report that Malaysia’s public finances are its “key rating weakness”, and warned of future negative shocks should no reforms and measures be taken by the federal government to remedy the country’s financial standing.
“Fitch’s downgrade of Malaysia’s sovereign credit rating outlook to negative (from stable previously) serves as a warning salvo to the government and investors alike,” said a daily market update by the RHB research arm here.
“While this may yet be the straw that breaks the camel’s back, it reinforces our view that the market is looking close to being fairly valued.”
The research house had previously predicted that the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM-KLCI) will close at 1,815 points by the end of the 2013 calendar year.
Yesterday, the market closed at 1,777.82 points, just around two per cent of RHB Research’s target index.
On Wednesday though, after the Fitch report was released, the FBM-KLCI dropped 1.3 per cent to 1,772.62, its steepest loss since June 13. The ringgit also sunk to a three-year low.
The ratings agency had cut its outlook for Malaysia on July 30, citing gloomier prospects for reforms to tackle the country’s rising debt burden following a divisive election result this year.
The opposition Pakatan Rakyat (PR) yesterday had fingered the Najib administration for Fitch’s negative reading, saying it was due to Putrajaya’s penchant for hiding debts especially in government-guaranteed debts.
RHBRI today noted that all eyes will be on Budget 2014, which has been scheduled for October 25 to accommodate this year’s internal election of Umno, the Malay nationalist party that makes part of the ruling Barisan Nasional (BN) coalition.
“The market will be looking for signposts for greater fiscal discipline by a government that has a deficit target of three per cent by 2015, although Fitch expressed reservation over its 3.5 per cent projection,” said the report.
Prime Minister Datuk Seri Najib Razak downplayed Fitch’s negative outlook yesterday, describing it as a temporary setback that would be addressed in the 2014 Budget.
No details, however, were given as to how Putrajaya plans to tackle some of the concerns raised in the Fitch report, but Najib said his administration was looking at the various existing policy options as a short-term solution.
Fitch’s report noted that the federal government debt rose to 53.3 per cent of gross domestic product (GDP) at the end of 2012, up from 51.6 per cent at the same period the year before.
The general government budget deficit had also increased from 3.8 per cent of GDP in 2011 to 4.7 per cent in 2012, coming from a 19 per cent rise in public wages expenditure in a pre-election year.
According to Bank Negara Malaysia, federal government debt currently stands at RM508.9 billion in the first quarter of 2013 compared to RM501.6 billion in the previous quarter.

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