Despite Fiscal Drag, Malaysian Economy Performed Strongly in First Half of 2014

Despite the drag on growth from fiscal consolidation, the Malaysian economy performed strongly in the first half of 2014 with real GDP growth averaging 6.3% year-on-year over this period, higher than all other major countries in the Asia-Pacific other than China.

Moody's Investors Service says the economy was buoyed by private sector consumption and investment.

Higher prices for petroleum and other hydrocarbons have also aided exports and government revenue, but this trend also underscores the susceptibility of external and fiscal balances to commodity prices.

At the same time, contingent risks to the government have continued to build, in part represented by the persistent rise in government-guaranteed debt.

Moody's conclusions were contained in its just-released credit analysis "Malaysia" which looks at the country's credit profile in terms of Economic Strength (assessed as "high (+)"); Institutional Strength ("high"); Fiscal Strength ("high (-)"); and Susceptibility to Event Risk ("low").

These represent the four main analytic factors in Moody's Sovereign Bond Rating Methodology. The analysis constitutes an annual update to investors and is not a rating action.

The Moody's report notes that the Malaysian government kicked off its fiscal reform program in 2013, prompting a revision of the outlook on the A3 sovereign rating to positive from stable last November.

The report further notes that the current account surplus and ample onshore liquidity remain intact and serve as buffers to potential external financial shocks.

While the share of non-resident participation in domestic government bond markets continues to rise, the potential for interest rate volatility in the event of an outflow is mitigated by the presence of large domestic institutional investors as reliable sources of funding for the government.

The report further notes that Malaysia's financial system continues to provide sound institutional and liquidity support, while its capital structure and funding base pose very low contingent risk to the sovereign.

The Moody's report says that the most prominent risk to financial stability is the rise in household indebtedness, which stood at 86.8% of GDP at the end of 2013, higher than other developing countries in the region, such as India, Indonesia and Thailand.

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