The Barisan Nasional's retention of the federal government assures the continuation of Malaysia's pro-growth policy, says Moody's Investor Services.
It said the outcome supports the stable outlook for the sovereign and
government-related issuers (GRIs) including Petroliam Nasional Bhd
(Petronas, A1 stable).Below is the credit outlook issued by the international ratings agency on Thursday:
On May 5, Malaysia's (A3 stable) ruling coalition, Barisan Nasional, retained its majority in parliamentary election, winning 133 of 222 seats in the national legislature.
The opposition coalition, Pakatan Rakyat, increased its representation to 89 seats from the 82 it won in the 2008 election, and, according to preliminary results, won the popular vote.
Barisan Nasional's retention of government assures the continuation of Malaysia's pro-growth policy, an outcome that supports the stable outlook for the sovereign and government-related issuers (GRIs) including Petroliam Nasional Bhd (Petronas, A1 stable).
But at the same time, Barisan Nasional's populist fiscal agenda clouds the prospects for fiscal reform.
With growth policies intact, the government is set to continue, if not accelerate, the development initiatives under its Economic Transformation Programme (ETP).
The ETP has been particularly successful in reviving private investment.
Since its promulgation in 2010, private gross fixed-capital formation averaged annual growth of 16.6 per cent during 2010-12, up from 2.9 per cent during 2005-09.
Budgetary support for household consumption has further bolstered domestic demand, providing a significant offset to the relative weakness in net exports, in view of Malaysia's heavy reliance on external trade.
Similarly, the election's completion and the additional fiscal transfers promised during the campaign should help sustain the momentum of investment and economic growth over the next two years.
Nevertheless, the long-term sustainability of government finances is contingent on fiscal reform, where the prospects are not so clear given the underlying features of Barisan Nasional's victory.
Although Prime Minister Najib Razak was sworn in on Monday, the opposition as of Wednesday had not officially conceded, citing irregularities in voting, and preliminary results reveal that the opposition had won the popular vote.
Consequently, Barisan Nasional's need to shore up electoral legitimacy may influence the pace of fiscal consolidation.
Already, it seems certain that populist spending measures brought up in both the budget passed last fall and during the election campaign will add to the burden of near-term government expenditure.
Moreover, the prospective implementation of a goods-and-services tax to diversify and increase the sources of government revenue may be as politically difficult as before.
But subsidy reform may be more tenable; Najib has publicly expressed his desire to reduce government spending on subsidies, while intending to use existing direct cash transfer programs to help the poor adjust to higher prices.
In the near-term, we expect the government to continue conducting fiscal policy in line with prevailing rules, including the requirement that current expenditures cannot exceed current revenues, as well as the 55 per cent debt ceiling for direct government obligations.
Status quo for Petronas and other Malaysian GRIs. Notably, the Barisan Nasional victory helps to preserve the status quo with regards to GRIs.
As part of its electoral platform, Pakatan Rakyat sought to address higher living costs by "abolishing monopolies," which threatened various GRIs' prevailing business models.
These include Petronas and Tenaga Nasional Bhd (Baa1 stable), as well as Axiata Group Bhd (Baa2 stable) and Telekom Malaysia Bhd (A3 stable), both of which operate in a more competitive market.
With Petronas in particular, the threat of an increased royalty payout and the redistribution of oil profits in the form of lower petrol prices would likely have resulted in a material deterioration in its credit profile.
Petronas' financial health and dominance in the domestic oil and gas sector is important to the sovereign given the state oil company's significant contribution to federal government revenues. Petroleum-related income has typically exceeded 30 per cent of total federal government revenue.
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