Tuesday, July 30, 2013

Market Weakness Brought On By Fitch's Downgrade

To me, its a "tell me something we don't already know". It is a knee jerk thingee, if ringgit weakens some more, our exporters will love Fitch even more.

Maybank Investment Bank has this hot off the press research op:

Fitch downgraded Malaysia's sovereign credit rating outlook to "negative" from "stable", although the existing high investment-grade ratings of "A-" on long-term foreign debt and "A" on long-term local debt are maintained.  It cited - and we quote - "that prospects for budgetary reform and fiscal consolidation to address weaknesses in the public finances have worsened since the government's weak showing in the May 2013 general elections".
This comes as no surprise to us.  Some of our clients may recall from previous presentations / meetings - especially those who raised to me the issue of / question on Malaysia's fiscal deficit and govt debt - that I mentioned the risk of the big-3 rating agencies - Moody's, S&P, Fitch - starting to at least downgrade our sovereign credit rating outlook to "negative" from "stable" after the 13th General Election (GE13) if there is no clear indications from the Government on fiscal reforms regarding subsidies (subsidy rationalisation programme suspended since mid-2011), taxes (GST deferred since the most recent plan to introduce in 2007) and government spending (there was another request for extra spending of over MYR12b by the Government via supplementary budget earlier this month).
Equity market down, RM/USD weakens, 10-Yr Govt bond yield rise.  FBMKLCI started the day further in the red.  RM/USD decisively breaks past 3.20 level, approaching 3.25 level early today.  10-year sovereign bond yield is closing on 4% mark.  The above rating news probably add to the cautious-to-weak sentiment in the financial and currency markets, ahead of the FOMC meeting this evening, squaring/clearing of positions before next week's long holidays for local festivity, and amid Malaysia's deteriorating trade / current account balance.  
S&P next?  We are also made to understand that the S&P team will be in Malaysia in September 2013 for the rating review exercise.
Government will be under pressure to act.  We now expect Budget 2014 to be unveiled at the Parliement on 25 Oct 2013 to provide clarity on the fiscal policy issues and direction.  For that matter, we now expect for there to be at least a modest adjustment in fuel prices before end of this year as a start to show commitment and political will to undertake fiscal reforms, to be followed by potential revisions in other energy subsidies (gas, electricity) early next year.  However, the introduction of GST is not expected in 2014, but more of a 2015 story.