Moody's Raises Malaysia's Credit Rating Outlook to ... - Maybank

Maybank FX ResearchFX Flash Wednesday, November 20, 2013Moody’s Raises Malaysia’s Credit Rating Outlook to Positive• Moody’s upgraded Malaysia’s A3 rating outlook from stable to positive, citing continuedmacroeconomic stability in the face of external headwinds as well as improved prospects forfiscal consolidation and reform. The rating agency specified that balance of payments has beenhealthy and expects narrower fiscal deficits on improved fiscal consolidation prospects. Thelatest move is affirmative of Budget 2014 and comes after Malaysia reported its strongestquarterly growth for the year and a material improvement in its current account for 3Q. Theupgrade in its outlook highlighted Malaysia’s fundamental strength and should increaseinvestors’ confidence in case of another global fund shake-up amid the QE tapering uncertainty.• From Moody’s rating review statement, conditions for a rating down/up would depend on:o Upgrade: Significant consolidation of the government’s fiscal deficits and the debt burdencould trigger.o Downgrade: Significant deterioration in Malaysia’s debt dynamics, possibly arising froman inability to successfully implement fiscal reforms; as well as adverse shocks to thecountry's funding conditions.• Market reaction was muted. The news did not lend much support to KLCI and the bourse stilltrades in modest red at the moment. USD/MYR had been supported for most of Asian hours andonly slipped a tad on the announcement before rebounding back to levels around 3.1850. 1-Month NDF merely softened and hovered around 3.1850. We think markets are probably lessthan enthusiastic as focus is on the FOMC Minutes due later in New York session and euphoriafizzled on the realization that Moody’s is merely playing catch-up on Fitch (A) and S&P (A). Thetwo other agencies have Malaysia’s rating a notch higher than Moody’s.• Little Buffer for Volatility Ahead. USD/MYR has been in a range for a while and QE taperingcould once again force a re-diversification of flows when the US Federal Reserve tightens the tapof liquidity. We already had a rehearsal of that in May-Aug and we can expect jitters to return tothe market once the holiday season is over. Outflows, however, are not expected to be as drasticas before. The ringgit could be vulnerable to outflows, albeit to a lesser extent given theimprovement in its current account and fiscal consolidation efforts, as affirmed by Moody’s latestoutlook upgrade. That could slow USD/MYR bids. We see the pair rising from our forecast of3.15 end 2013, to 3.20 by the end of 1Q2014.

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