Monday, 5 August 2013

The Impact of Standards & Poor and Fitch Rating towards Malaysia

I don't wish to be called the harbinger of bad news but truth be told, an article I wrote 2 months ago about International Rating Agencies warning of possible downgrading of Malaysia's credit rating has turned into a reality. 

The first warning shot came from a press release by Standards & Poor (S&P) on the 26th of July 2013. S&P decided to maintain the credit rating of Malaysia as shown below:

However, S&P also reiterated their warning that if Malaysia fail to deliver reform measures, the ratings would be lowered as stated below:

While we might have escaped S&P's rating (at least for now), another international rating agency known as Fitch Rating decided to downgrade our ratings as shown in this headline from TheStar dated 1st August 2013:

Fitch Rating agency raised concerns about the Government's ability to reduce debt and has further warned that credit ratings would be lowered further if there is no improvement. Our beloved Government on the other has responded and reaffirmed that they would "rationalise subsidies" and "broaden the tax base"

Long has it been the warning (I believe since September 2012) given by rating agencies for our Government to begin implementing measures to reduce the county's debt. None has been implemented and neither has the "spending" been prudent. The ultimatum was finally delivered by Fitch Rating and this serves as a wake up call for all responsible parties to start bucking up. 

As we know, Malaysian's despises drastic changes. Our country is at a point where excessive measures might need to be introduced due to early warnings for gradual improvements were left unheeded. Now that our we are "standing in a whole load of crap", any steps taken now would cause both immediate and long term shocks to the economy and the stock market.

1) Immediate Impact:
Upon the news release of Fitch downgrading, the Kuala Lumpur Stock Exchange Index fell by 22.46 points (-1.25%) on the next day of trading. The drop was largely caused by foreign investors exiting the stock market upon the news being released. This would be the immediate impact for Malaysia whenever there is a downgrade or an upgrade on the ratings.

2) Long Term Impact:
In order to upgrade or even to maintain the existing rating, it is inevitable that reforms have to be carried out by the central government. A fiscal committee has been set up to look into this issue and propose solutions to address this concern. With the National Budget 2014 expected to be table on the 25th of October 2013, do not be surprised if some of the solutions consist of major subsidy cuts as well as higher taxation. 

Behind Every Cloud There Would Be A Silver Lining
As the saying above goes, there will always be a silver lining despite all the negativity that surrounds the debt issue of Malaysia. As Malaysians, we should be clear that the issue of debt is not Malaysia alone, but an issue most countries are also facing. The Government and Central Bank plays a pivotal role to ensure spending are allocated for key developments that would encourage economic growth. 

As Malaysians we continue to hope for positive changes and to one day live in an Utopian dream of a perfect country. To hope for changes, we are still far away from reality. Yet we should start takeing our own actions to protect our money/wealth from being eaten up by long term inflation caused by the fiscal problem. 

Search for opportunities to invest at market lows and protect the value of your savings by practicing smart yet prudent investing. Do not make hasty decisions and stay away from so called "investment schemes scams"that require you to invest so little yet able to offer you tremendous rewards. 

If you find all this too hard and tedious for you, seek for passive investments such as unit trust. There are some excellent fund managers out there that share the same kind of investing philosophy as I have mentioned earlier. The performance of the fund they manage speak volumes by itself!

With this I bid all of you cheers and Happy Investing!

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