KUALA LUMPUR - Moody's cut Malaysia's sovereign rating outlook to stable from positive on Monday, flagging risks from the Southeast Asian economy's deteriorating growth profile as global trade and market conditions worsen.
The ratings agency had assigned a positive outlook to Malaysia's A3 rating in November 2013 on the view that continued improvements in the government's balance sheet could boost its economic fundamentals.
But Southeast Asia's third-largest economy, a gas and commodities exporter, has since been hit by falling oil prices and a slowdown in China.
Its exports, which were a rare bright spot in its economy, rose at only half the anticipated pace in November and industrial production slowed to its weakest pace in 16 months.
Moody's said the changes in Malaysia's external environment have reduced government revenues over the past year. "Those environmental changes have also undermined Malaysia's external position, with large capital outflows, a falling current account surplus, sharp exchange rate depreciation and falling reserves," the ratings house said in a report.
For the July-September quarter, Malaysia reported its smallest current account surplus in more than two years.
And despite progress regarding fiscal consolidation, Moody's expects Malaysia's public debt burden and debt affordability will see only limited improvement.
While not referenced in Moody's ratings review, Malaysia's investment landscape has also been clouded by a scandal surrounding over $11 billion in debt racked up by state fund 1MDB. The state investor sold its energy business and some of its real estate assets last year to repay the debt.
Prime Minister Najib Razak is expected to make adjustments to the 2016 budget this month to take into account the challenges expected in the new year.
Malaysia's ringgit was Asia's worst performing currency last year, slumping more than 18 per cent against the dollar.
After the Moody's revision, the ringgit extended losses to 4.4120 per dollar from around 4.3950 before the announcement. It was at 4.3970 at 0645 GMT. "Malaysia is in a delicate position amid swirling undercurrents," said ANZ Economist Weiwen Ng. "Oil might once again prove to be Malaysia's Achilles Heel with risk of fiscal slippage and current account to halve this year from the previous year." Ng highlighted worsened risks from the China-related markets rout at a time when growth is already skewed to the downside.
Malaysia credit default swaps underperformed the broader credit market on Monday, with the cost of credit protection rising faster than lower-rated sovereigns Thailand and the Philippines, in reaction to the Moody's revision and the production data.