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Fitch You!
Fitch You Too ...

As reported in Bloomberg today, Fitch Ratings came out with some good constructive criticisms, some so-so ...

Sept. 8 (Bloomberg) -- Malaysia's plan to reduce its budget deficit next year isn't enough to win the country a rating upgrade because the government is still spending too much and its debt is too high, according to Fitch Ratings.Fitch won't review its A- rating, the seventh-highest investment grade, for Malaysia, said James McCormack, head of Asia sovereign ratings at Fitch.``If you look at overall deficit levels in Malaysia and you look at government debt levels, they're not in line with the sovereign ratings, .. The debt levels are too high, the government spends too much money, and the budget has taken a problem and really has not improved it at all.''

My Take - The 4-5 years following 1998 was a necessary step to give the economy some platform shoes to stand on, no need to criticise that, it was a necessary move. The last 3 years, should have taken a harder stance to trim the debt levels. The recent Budget saw a 31% increase in spending - danger is that with UMNO and general elections likely by 2H2007 and 1H2008 respectively, that kind of spending might have to accelerate even more next year. However, Fitch might have been too rash with the Budget increase, Badawi is counting on the increase in petroleum taxes from Petronas to fund the increase, and we can afford to do it and should do it.

Fitch Ratings said that Malaysia has posted budget deficits since 1998, when the government started spending more than it earned to revive an economy hurt by the Asian financial crisis. The deficit is forecast to fall to an eight-year-low of 3.4 percent of gross domestic product, or 20.2 billion ringgit, next year. Government revenue is expected to rise 12 percent to RM134.8 billion next year, with oil-related revenue accounting for RM53.7 billion, or 40 percent of the total, the finance ministry said in a report last week. '`In a high oil price environment they really should have improving government finances and they're not,'' McCormack said. ``It's a concern.'' Fitch and other rating companies have said Malaysia needs to reduce its government debt more aggressively before ratings can be raised.

Standard & Poor's, which has an A- rating on Malaysia's foreign currency sovereign debt, said on Sept. 5 it's keeping the rating unchanged. These international ratings agencies look too much into fiscal deficit. Still, Malaysia can finance this deficit domestically, and it looks like they are reducing their external debt going into 2007, which is actually an encouraging sign.

My Take - The present rating is fine, no need to garner a higher rating yet. Bank Negara's international reserves at a steady US$79.3 billion, meaning the ringgit should see at least room for a 5% gain over the next 12 months. These economic levers are there to cushion the deficit issue. As usual, the ratings agency has been too severe in its views. Though I believe there is something wrong with Malaysia's stock markets, the deficit is not one of the reasons. Fitch you, somehow I think a local/Asian should be speaking for Fitch Ratings ... hmmm.... McCormack / McCormick, isn't that a spice rack??!!

Comments

I would be grateful if you explain this statement: "Bank Negara's international reserves at a steady US$79.3 billion, meaning the ringgit should see at least room for a 5% gain over the next 12 months."

How does the reserves affect the appreciation? Why 5% ?

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