Fitch, one of the big three international rating agency recently downgraded Malaysia’s credit standing. This has highlighted that the government has to improve on its fiscal policy and management. The first step taken by the government was to begin to rationalize subsidies leading to immediate increase in price of Ron 95 by RM0.20. Fiscal consolidation to further strengthen the fiscal position will be the implementation of the controversial goods and service tax( GST ) on April,2015. a) Comment on whether the downgrading by Fitch is justified. Substantiate your view.

Sovereign credit rating is crucial for investors as it provides a deep understanding of the risk associated with investing in a particular country and also the political risks that involved (Investopedia, n.d.). Being a developing country, it is important to get good sovereign credit rating as it helps to access funding in international bond markets. On Tuesday, 30th July 2013, Fitch has announced downgrade Malaysia’s sovereign credit rating outlook to Negative from Stable. This is the most serious action taken by a global rating agency to date. Fitch negative credit outlook on Malaysia create a negative impact on Malaysia in term of higher costs of borrowings and also result into a higher inflationary effect (The Malay Mail Online, 2013). However, Fitch still maintained Malaysia’s existing high investment-grade ratings “A-“ on long-term foreign debt meanwhile rating for long-term local debt is “A” (Maierbrugger, 2013).

As highlighted by Fitch, the major reason of the downgrading is due to the worsening in Malaysia’s public finance especially the rising debt levels, and anticipated weakening of prospects for fiscal consolidation and budgetary reforms. From my personal point of view, the downgrading by Fitch is justifiable. My viewpoints are substantiated based on my findings as below