Repost: S&P Downgrades Rtgs On Malaysia
I don't kno if this has been posted before: Please bear with me if so:
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Business Wire - December 22, 1997 20:46
%SP %NEW-YORK %GOVERNMENT V%BW P%BW
MELBOURNE, Australia--(BUSINESS WIRE)--Standard & Poor's CreditWire 12/22/97--Standard & Poor's today lowered its long-term foreign currency rating of the Federation of Malaysia to single-'A' from single-'A'-plus, and its local currency rating to double-'A' from double-'A'-plus.
Standard & Poor's also lowered its short-term foreign currency rating of the Federation to 'A-1' from 'A-1'-plus. At the same time, Standard & Poor's affirmed its 'A-1'-plus short-term local currency rating on Malaysia.
The outlook on the long-term ratings remains negative.
The downgrades reflect:
The economic stress of protracted private-sector restructuring as corporations reduce their high leverage and vulnerability to financial-market volatility. Credit to the private sector surged on average 29% per year during 1995-1997, propelling corporate and household indebtedness to over 170% of GDP this year, from 125% in 1994. A sharp deceleration in economic growth to below 2% in 1998 will impair corporate and bank balance sheets significantly, even if future bank lending slows as planned. Pressures on the corporate sector, however, should be considerably more manageable than in Indonesia, Korea and Thailand.
Expected further deterioration in financial-system asset quality. Nonperforming loans could more than double to over 15% of total credit by end-1998, particularly as the property market, comprising 25% of system loans, softens markedly. Bank recapitalization requirements, in turn, could exceed 20% of 1997 GDP, imposing a sizable burden on government finances and the economy at large. However, stress in the financial system is unlikely to translate into severe external liquidity pressures akin to those prevailing in neighboring countries, given the low external indebtedness of the Malaysian private sector, estimated at the equivalent of only 20% of exports this year.
Lack of transparency, and pervasive moral hazard in the economy. Inadequate disclosure standards and linkages between the political and business elites impedes timely recognition of problems in the financial and corporate sectors, and the implementation of market-based solutions to resolve them. In addition, the top priority accorded to balancing the demands of Malaysia's multi-ethnic society raises the likelihood that the government will assume private-sector credit risks to the detriment of both public finances and investor confidence.
Weakened growth prospects, as financial-sector restructuring and consolidation over the medium term impairs the sector's capacity to effectively intermediate savings and investment. Bank credit is likely to become excessively scarce and expensive as bearish investor sentiment worsens, prolonging the economic downturn beyond 1998.
Malaysia's investment-grade ratings continue to reflect: A sound external financial and liquidity position. Liquid international reserves of over US$24 billion are three-times short-term external debt outstanding, and favorably distinguish Malaysia from its neighbors and similarly-rated sovereigns. Net external debt, including that of the private sector, is under 10% of exports this year, while total debt service (including short-term debt service) is low compared with other 'A'-category sovereigns, and is estimated at 23% of exports annually during 1998-99.
Moderate government indebtedness. Net of liquid financial assets, general government debt is practically nil, which confers substantial fiscal flexibility to absorb losses in the financial sector. General government finances, excluding bank support operations, are expected to remain in surplus in 1998, reflecting an impressive fiscal adjustment, despite the expected economic slowdown next year.
An internationally competitive, export-oriented economy. Malaysia's large and diversified export base-with exports amounting to nearly 100% of GDP, and ranging from primary commodities such as oil, gas, and palm oil to high-value-added electrical equipment and consumer electronics-is likely to cushion the cyclical downturn during 1998-1999. The country's infrastructure, superior to that of its neighbors, should underpin continued inflows of foreign direct investment in manufacturing goods, and help retain the competitiveness of its exports, which mainly serve the North American and European markets.
OUTLOOK: NEGATIVE
The economic stabilization and reform package announced on Dec. 5, 1997 represents an important step towards tempering excessive domestic demand, and easing supply-side pressures on inflation and the balance of payments. Deep cuts in government spending, coupled with measures to slow the expansion of bank lending,, are expected to halve the current-account deficit to under 3% of GDP in 1998.
More importantly, measures aimed at reducing moral hazard in the economy, including higher disclosure standards and the application of market-based solutions to redress problems in the private sector, should stabilize Malaysia's credit standing at current rating levels, if fully implemented. However, ongoing volatility in the country's stock and foreign exchange markets, and the deepening crisis in investor confidence in the region more generally, could precipitate even higher losses in the corporate and financial sectors that would test the stated commitment to orthodox economic policies. Another ratings downgrade could occur if public and private sector credit risks are not clearly distinguished going forward, and the authorities fail to impose market discipline in response to potential insolvencies in the corporate and financial sectors, Standard & Poor's said. -- CreditWire.
CONTACT: Ashok Bhatia, London (44) 171-826-3731
Cem Karacadag, New York (1) 212-208-8984
Terry Chan, Melbourne (61) 3-9250-4532
For more information on criteria or subscriptions:
ratings.standardpoor.com
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