Malaysia's Budget May Put Ringgit, Ratings at Risk, RBS Says

By David Yong

Sept. 1 (Bloomberg) -- Malaysia may miss its budget-deficit target because lower oil prices may hurt revenue, putting the nation's currency and credit rating at risk, according to the Royal Bank of Scotland Group Plc.

The government's projections for a narrower shortfall may unravel, RBS's Singapore-based analysts Sanjay Mathur and Scott Wilson said in a research note today. Prime Minister Abdullah Ahmad Badawi is counting on oil prices to average $125 a barrel in 2009, unchanged from 2008. Malaysia depends on oil exports to make up for losses from a slew of handouts including lower personal income tax and import duties on consumer goods.

``Softer oil prices could derail the fiscal arithmetic,'' Mathur and Wilson wrote. ``Should the current softening of oil prices continue, attaining the revenue target will be difficult. We are skeptical that the 2009 deficit target will be met.''

RBS, the U.K.'s second-biggest banking group, said the ringgit, ``with risks skewed to the upside,'' may drop to 3.5 per dollar by the end of the year, maintaining its earlier forecast. That would be the weakest level since Sept. 12, 2007.

Fiscal measures to boost the purchasing power of consumers as well as Bank Negara Malaysia's accommodating monetary policy can only add to the pressure on the ringgit, according to RBS.

The finance ministry said Aug. 29 that the budget deficit will narrow to 3.6 percent of gross domestic product in 2009, from a five-year high of 4.8 percent this year. The government projected its revenue will rise 9.1 percent to 176.2 billion ringgit ($51.8 billion) and total spending to rise 3.8 percent to 204.7 billion ringgit.

Oil Exporter

Malaysia is the second-largest oil producer in Southeast Asia. Oil sales will account for 6.7 percent of all exports in 2009, versus 7 percent in 2008, according to the finance ministry's forecasts.

Crude oil prices in New York have dropped 21 percent from their all-time high of $147.27 a barrel reached on July 11.

The ringgit slumped 4.2 percent in August, its worst month since Bank Negara Malaysia scrapped a fixed peg to the dollar in July 2005. The currency traded at 3.394 on Aug. 29. Local financial markets are closed today for a public holiday.

The central bank has kept its overnight policy rate at 3.5 percent in 19 straight meeting since April 2006, even as inflation in Southeast Asia's third-largest economy accelerated to a 27-year high of 8.5 percent in July.

Fitch Ratings may cut the sovereign outlook on Malaysia to `stable' from `positive' in the near term, RBS's analysts said. Failure to reverse the fiscal trend could put its rating at risk of a downgrade in the medium term, they said.

Cutting Outlook

Fitch last raised Malaysia's credit rating by one level to A-, the fourth-lowest investment grade, with a positive outlook in November 2004, according to data compiled by Bloomberg. Standard & Poor's on May 15 cut its outlook to `stable' from `positive.'

James McCormack, head of Fitch's Asian sovereign ratings based in Hong Kong, couldn't be reached for comments.

Malaysia's economy grew 6.3 percent in the second quarter, the slowest in a year, the finance ministry forecast. It expanded 7.1 percent in the first quarter. Annual growth will ease to 5.7 percent in 2008 and to 5.4 percent in 2009, versus 6.3 percent in 2007, it said.

To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net.