KUALA LUMPUR (Aug 22): Malaysia may see a rating upgrade next year on the back of ongoing fiscal consolidation, better governance, strong economic fundamentals and public finances that includes the federal debt-to-GDP ratio, said the Malaysian Institute of Economic Research (MIER).

In a statement on Thursday, it said the country could move up the ladder to “A-” from “BBB+” currently for the Fitch rating, while S&P may upgrade the rating to “A"  from “A-” currently.

MIER expects the pick-up in foreign investor appetite in the local equity market to continue in the second half of the year (2H2024) and even extend into 2025. Among the key drivers are political stability, ongoing policy reforms, execution of the many frameworks and blueprints announced that would benefit key sectors, strong commitment to sustainability and long-term competitiveness.

The benchmark FBM KLCI index has gained 12.86% year to date to close at 1,641.66 points on Thursday.

MIER also expects demand for domestic bonds to remain strong in 2H2024. The reaffirmation of Malaysia’s sovereign credit ratings with a "stable" outlook from both the S&P and Fitch would continue to appeal to foreign investors, apart from potential rate cuts by the US Federal Reserve, stronger ringgit outlook, healthy domestic macro fundamentals as well as clear policy direction from the Madani framework.

“S&P’s assessment on Malaysia’s sovereign credit rating reflects the country’s sustainable economic growth, narrowing deficit that is supported by healthy labour market conditions, and progressive wage policies.

“Fitch’s focus is on export base diversification, robust economy, and strong current account surpluses as key reasons for its stable outlook,” it explained.

On the economy front, MIER said the economy may even surpass 5% driven by the positive sentiment. Key drivers include current political stability, macro fundamentals, inflow of foreign direct investments and realised investments, services supported by domestic demand and tourist arrivals, construction/infrastructure, exports, corporate earnings, labour market, stronger ringgit, reforms and initiatives under the national master plans.

Malaysia’s GDP is forecast to reach the upper end of the 4-5% target, following the 5.9% year-on-year (y-o-y) growth in 2Q 2024, which was ranked third in the Asean region, just behind Vietnam (6.9%) and the Philippines (6.3%). GDP for Indonesia, Singapore and Thailand grew 5%, 2.9% and 1.3% respectively.

Domestic demand in 2024 is projected to grow around 6% y-o-y supported by private spending (6.1%) and public spending (5.7%), while exports are expected to grow at 8% y-o-y. Growth will also be supported from services (5.3%), manufacturing (4.1%) and construction (12.8%). Both agriculture (3.7%) and mining (2.8%) would complement growth.

MIER expects borrowing costs to remain stable for the rest of 2024 as the overnight policy rate (OPR) is anticipated to stay at 3%.

That said, it cautioned that inflation could rise in 2H2024 due to both domestic and external shocks. “But the upside on inflation would remain at a manageable level,” it noted.

Notably, Malaysia’s headline inflation remained steady at 2% in July for the second month since the start of diesel subsidy rationalisation on June 10. Year to date, inflation came in at 1.8%.

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