Moody's Investors Service says in its annual credit analysis that Malaysia's A3 sovereign rating -- with a stable outlook -- is anchored by resilient growth and a strong external position, although debt levels continue to rise as deficits remain relatively wide.
The stable outlook balances the initial gains from the government's efforts at administrative reform and economic restructuring against structural weaknesses in the government's finances. Government revenue is still reliant on hydrocarbon-based receipts, while the subsidy bill remains a main driver of expenditure growth.
Moody's further notes that fiscal policy has been increasingly constrained as debt levels rise towards the debt ceiling of 55% of GDP. The government has reiterated its commitment to the narrowing of the fiscal deficit and implementing associated reforms, but the ruling coalition's weaker electoral mandate could slow the pace of fiscal consolidation.
The current account surplus has eroded due to a deterioration in export demand against the backdrop of strong domestic economic activity. At the same time, Malaysia's external accounts continue to be healthier than most similarly-rated peers, says the report.
Capital market depth, the large buffer of foreign exchange reserves, and a favorable debt structure also guard against a disruptive reversal of the non-resident accumulation of Malaysian government debt, says Moody's.
Following the parliamentary elections in May, policy continuity supports near-term growth prospects, although political noise is expected to persist in the near term.
Finally, Malaysia's relatively large banking system poses manageable risks, while an improved assessment of the country's capacity and willingness to service cross-border payments has led to higher foreign currency bond ceilings, as announced in January 2013.