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Ringgit declines as Fitch flags possible rating cut in Malaysia

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The ringgit fell as Fitch Ratings said Malaysia's credit ranking sits "more naturally" in the BBB range, suggesting a possible downgrade.

[KUALA LUMPUR] The ringgit fell as Fitch Ratings said Malaysia's credit ranking sits "more naturally" in the BBB range, suggesting a possible downgrade.

A deterioration in the current-account surplus exposes Malaysia to volatility in investor sentiment and Fitch will review the country in the second quarter, Andrew Colquhoun, the company's head of Asia-Pacific sovereign ratings, said in an interview Wednesday in Singapore. The nation is currently rated A-, the fourth-lowest investment grade, and two levels above BBB. There's more than a 50 per cent likelihood of a rating cut, Mr Colquhoun said.

The ringgit dropped 0.3 per cent to 3.7080 a dollar as of 3:53 pm in Kuala Lumpur, after earlier rising as much as 0.2 per cent, data compiled by Bloomberg show. One-month non- deliverable forwards declined 0.37 per cent to 3.7183.

"The Fitch comments saw the ringgit giving up its gains," said Khoon Goh, a Singapore-based strategist at Australia and New Zealand Banking Group Ltd. "There is a risk of a rating cut, but it's hard to say whether this has been priced in or not."

Plunging crude prices prompted the government to raise this year's fiscal-deficit target and cut the economic growth forecast as a drop in earnings hurts Asia's only major oil exporter. The ringgit fell 13 per cent against the dollar in the past six months, Asia's biggest loss, and sentiment has been worsened by concern that state investment company 1Malaysia Development Bhd. will struggle to meets its debt obligations.

Weak Governance 1MDB has drawn criticism from lawmakers because of its rising borrowing, with debt totaling RM41.9 billion (S$15.73 billion) as of March 2014. It repaid a US$563 million overdue loan in February, after rescheduling the payment, and the government this month provided the company with a US$257 million standby credit facility.

A BBB rating might be more suitable for Malaysia due to its level of income and development, and the nation scores weaker in terms of governance among its peers, Fitch's Mr Colquhoun said. 1MDB is a country demonstration of what weak governance means, he said. Fitch had said in January that 1MDB was a "contingent liability" on the sovereign.

Fitch said in a Jan 20 statement that it's "more likely than not" to downgrade Malaysia's rating, with the nation's dependence on commodities a key credit weakness. Brent crude has more than halved since June to US$53.05 a barrel.

Malaysia's current-account surplus shrank to RM6.1 billion in the fourth quarter, the least since June 2013. Exports contracted in January for only the second time since 2013 and the government raised its 2015 fiscal-deficit target to 3.2 per cent of gross domestic product from 3 per cent.

Bond Plan Malaysia is planning to tap the global bond market with an issue of as much as $2 billion of Islamic debt and has hired banks to arrange the sale. The yield on the nation's existing dollar-denominated sukuk due in 2021 rose three basis points Wednesday to 3.09 per cent.

The cost of insuring Malaysia's sovereign debt for five years using credit-default swaps has dropped to 136 from a four-month high of 151 in January, CMA prices show. That's up from the five-year average of 101.

Moody's Investors Service and Standard & Poor's also rank Malaysia at their fourth-lowest investment grades and have affirmed those ratings in the past month.

Malaysia's bonds are already trading near BBB levels after Fitch placed the credit rating on negative watch more than a year ago, said Chua Hak Bin, Singapore-based economist at Bank of America-Merrill Lunch. With S&P and Moody's still standing firm on their ratings, there's no reason to see significant reaction to Fitch's imminent downgrade, he said.

BLOOMBERG