Monthly Overview / January 2020
In this month’s issue:
- Country Risk: Economic Community of West African States, Taiwan
- Country Risk Updates: Azerbaijan, Nigeria, Malaysia
Economic Community of West African States:
Eco to replace CFA franc as new West African currency in 2020
At the end of December 2019, Ivorian President Ouattara and French President Macron officially announced the creation of the eco as the future new regional currency replacing and reforming the CFA franc. The eight CFA countries of the West African Economic and Monetary Union (WAEMU: Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo) signed the agreement. They will be the first members of the new regional monetary union. In a second phase, the non-CFA members of the Economic Community of West African States (ECOWAS: Cabo Verde, Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone) would join as well once they meet predefined economic criteria (related to fiscal deficit, foreign exchange reserves, inflation, etc.). Ghana could already join in the first stage. Thus, in total, the 15 ECOWAS countries are expected to use the eco. The participation of Nigeria has yet to be officially confirmed. As for the CEMAC (which has a separate Central Bank), its mostly oil-dependent members (Cameroon, Chad, Central African Republic, Congo Republic, Equatorial Guinea and Gabon) might also choose to break the monetary link with France in the medium/long term.
While the planning of the eco introduction, which will occur gradually, is not yet firmly established, the eco is expected to be introduced during the second half of this year, probably before Côte d’Ivoire’s October elections. In addition to the change of name, the currency reform provides for two other changes. 50% of the BCEAO’s (Central Bank of West African States) foreign exchange reserves will no longer be deposited at the French Treasury, and France will no longer have a representative on the BCEAO’s board of directors. However, the peg to the euro will be maintained in the short term. In the end, the BCEAO – whose central policy goal will be inflation control – will have full monetary independence.
The CFA franc, set up in 1945, has been increasingly criticised as a lingering post-colonial heritage. The latest announcement is seen as an extra step towards further completion of decolonisation and towards monetary sovereignty. Although it remains to be seen whether practical issues around the eco launch will be overcome this year, the upcoming eco era will have several consequences, present challenges and leave some questions unanswered. Symbolically, sooner or later, the end of the CFA franc was just a matter of time. The recent acceleration of the move from theory to practice has been triggered by the anti-French wave that spread across CFA countries including vocal calls from some West African leaders. Still, despite the announced changes, France will remain involved in the transition period as it committed to maintaining the unlimited convertibility guarantee to the euro and to providing euros to the BCEAO in a crisis situation. In the medium term, however, it is inevitable that this key aspect of the CFA franc system will be removed. After an undetermined transition period of stability aimed at reassuring investors and preventing capital outflows, the eco will become more flexible, see the peg to the euro dropped and potentially be replaced by a peg to a basket of the eco members’ main trade partners’ currencies. The future exchange rate system has yet to be agreed on between the future members.
The consequences in terms of country risks are hard to assess at this stage not least as long as the final structure of the currency reform is not decided. The move to the eco will provide costs and benefits. Regardless of the symbolic aspects of the CFA franc, membership to this economic and monetary zone has brought financial stability (e.g. low inflation and interest rates) and improved external liquidity, thereby supporting international trade and facilitating Eurobonds issuance. Over the past years, it has certainly contributed to stronger average GDP growth within the WAEMU compared with the rest of Sub-Saharan Africa. The likely future removal of the unlimited convertibility guarantee of the eco to the euro will cancel a major mitigating factor of transfer risk for the current CFA countries and will bring new challenges. Political stability, good governance and macroeconomic stability will be further scrutinised by investors and could lead to more currency volatility. Although economic convergence has improved between WAEMU members, the new regional monetary zone will be more heterogeneous by including oil importers and exporters, small economies (Gambia, Guinea-Bissau, Togo), the largest African economy (Nigeria), very poor countries (Liberia, Sierra Leone), countries hit by conflicts (Mali, Burkina Faso, Niger), successful economies (Côte d’Ivoire, Senegal) and successful economies with a history of high currency volatility (Ghana). Therefore, the required macroeconomic convergence between all ECOWAS countries promises to be very challenging as no country met all the convergence criteria in 2018, and this will certainly cause the eco to be postponed in several countries.
In the short term, the eco is likely to be stable. Nevertheless, if the peg to the euro is dropped, managing the eco volatility when the eco zone integrates more country members will be costly for the region in terms of foreign exchange reserves. Another issue (similar to the Eurozone experience) relates to Nigeria’s dominance within the monetary zone, should it adopt the eco. Its disproportionate economic weight (about 2/3 of the regional GDP) will translate into a biased monetary policy potentially harming many economies that are not synchronised with it. Besides, the non-CFA countries of the new regional monetary union will have to give up the sovereign monetary tool and compensate with domestic fiscal measures when they are hit by an external shock as the system of the eco will provide no fiscal solidarity mechanism.
Alongside the perceived economic and transfer risks, the eco will bring benefits such as lower transaction costs and heightened competitiveness for regional exports which could further boost economic development. The psychological dimension matters as well. In spite of potential instability risks, the fact that West Africa is likely to eventually have full monetary dependence and countries will participate to a common African and regional project could raise people and investors’ confidence, and also improve cooperation. As a result, it could help improve economic convergence and expand intraregional trade from its very low level within ECOWAS (i.e. barely 10% of the total). To this end and to make the eco more than an end in itself, it will be essential that infrastructures are further developed, economic diversification promoted and red tape reduced.
Analyst: Raphaël Cecchi – email@example.com
Policy continuity and strained relations with Beijing to be expected under the re-elected president
On 11 January 2020, incumbent President Tsai Ing-wen was comfortably re-elected after a landslide victory at the presidential elections with 57% of the vote, ahead of the Kuomintang’s candidate (38%). Her Democratic Progressive Party (DPP) also kept its parliamentary majority – with less seats though – after legislative elections. The turnout (75%) was higher than in the 2016 elections.
Her chances of running a second mandate seemed after she largely lost local elections in 2018, among other thing due socioeconomic discontent. However, protracted mass protest and defiance against pro-Beijing authorities in Hong Kong have probably been decisive in boosting Tsai’s re-election. By an uncontested support to the pro-independence president and her party, the population – more attached to democracy than ever – has indeed expressed its rejection of China’s proposal to apply the “one country, two systems” principle in Hong Kong. Tsai’s second term and a DPP majority should allow for policy continuity and maintain the pro-investment focus, including the relocation of Taiwanese companies away from mainland China (notably to circumvent US Tariffs), whereas some tax reforms could be in the pipeline to address the population’s evils of high housing prices and the wealth gap.
The biggest risk to the MLT outlook will remain the relation with Beijing, which in fact what was really at stake during the latest elections. Since 2016, billateral relations have detoriorated as Tsai’s pro-independence stance faced China’s growing diplomatic, economic and military pressures. Therefore, the political outlook fot the next four years is negative with Xi Jinping expected ro increase pressure on Taiwan in order to reach the eventual Chinese reunification. However, with Tsai as president and a population less and less sharing the Chinese identity, an increasingly impatient XI Jinping might gradually come to the conclusion that the reunification goal will be impossible to achieve peacefully. Hence, Xi Jinping’s insistence will grow in the coming years and so will the conflict risk, as teh US will keep a central role in future cross-strait developments and is likely to remain Taiwan’s closest partner as the China-US rivalry intensifies. Meanwhile, given continuity in policy, Credendo’s political risk rating remains unchanged at 1/7.
Analyst: Raphaël Cecchi –firstname.lastname@example.org
Country Risk Updates
MLT political risk rating upgraded from 5/7 to 4/7
Stable political situation but risks arising from generation overhaul and unresolved dispute with Armenia
Nearly since Azerbaijans independence from Russia in 1991, the country’s political scene has been dominated by the Aliyev family. in 2003, President Ilham Aliyev succeeded his father who had ruled the country with an iron fist since 1993. Since his first election in 2003, Ilham Aliyev abolished the two-term presidential limit and was re-elected several times (in 2008, 2013 and 2018). His party and independents (close to the power) control a vast majority in parliament. A generational overhaul is underway and the post of Prime Minister was created in October 2019.
President Aliyev exercises strong control over the political, economic and social life. Recently, some signs of growing social unease have emerged amid deteriorating socioeconomic conditions. In this context, the parliamentary elections scheduled in February this year could be marked by a resurgence of the opposition. Full destabilisation is not the baseline scenario but soviet history has shown that reforms (cf. the generation overhaul) can raise public hopes and then cause a backlash.
The Nagorno-Karabakh dispute with Armenia dates back to 1991 when the region dominated by Armenians declared its independence from Azerbaijan. It was followed by an armed conflict between Armenia and Azerbaijan that ended by a UN ceasefire agreement in 1994. Since then, negotiations with Armenia on the status of the Armenia-supported breakaway republic of Nagorno-Karabakh have made very slow progress, with events such as the presidents of Armenia and Azerbaijan meeting in 2019 (which is already progress in itself). Even if it has diminished recently, the risk of an armed conflict with Armenia remains given Azerbaijan’s sharp increase in military capabilities over the past years and Russia’s military presence in Armenia. Relations with other neighbours (Turkey and Iran) are good. That being said, the recent escalation of tensions between the US and Iran could have a negative spillover impact on the Caucasus region.
High reliance on oil and gas…
Azerbaijan is highly reliant on oil and gas. Hence, the Azerbaijani economy was hit hard by the sharp drop in oil prices that started mid-2014. Real GDP growth contracted in 2016. It has partly recovered thanks to the development of hydrocarbon resources and a rebound in oil prices as of 2017. This year, real GDP growth is expected to be slower than in 2019.
The dynamics of the balance of payments is also heavily influenced by energy prices and production fluctuations. After having posted a deficit in 2015-2016, the current account reached a surplus as of 2017 even if current account receipts in 2018-2019 are still far below the level reached in 2011-2014. Looking ahead, the current account receipts are expected to remain broadly stable. Indeed, hydrocarbon production is expected to stabilise as the expanding production from the Shah Deniz 2 gas project and the Azeri Central East oil project compensate for the declining production in other oil fields. It should be noted that oil reserves are expected to be depleted in 20-25 years whereas the gas production horizon is large and equivalent to more than 100 years.
The oil and gas sector also has a large influence on the financial account. Indeed, following years of large FDI inflows (related to gas projects), FDI are expected to remain muted as no other major projects are foreseen and foreign investors are deterred by the poor investment climate in a country where the state dominates the economy. Since years, Azerbaijan’s financial account has been marked by large capital outflows that are driven by the strategy of the country to constitute a sovereign wealth fund – the State Oil Fund of Azerbaijan (SOFAZ) – which equalled nearly 90% of GDP in 2019. Thanks to this large sovereign wealth fund, Azerbaijan is a net external creditor. Looking ahead, the country is likely to remain an external creditor. Of course, energy price fluctuation has a large influence on the international investment position as shown by the 2014 experience when external debt surged and SOFAZ dropped by about 10%.
Liquidity is adequate but still below its pre-crisis level
The gross foreign exchange reserves dropped by almost 60% in 2015 (cf. graph 3) as the authorities tried to defend the fixed exchange rate in relation to the USD. It resulted in two sharp devaluations in 2015 and a lower level of liquidity. Since then, the gross foreign exchange reserves have slightly increased but they remain low compared to their historical level. Still they are adequate as they cover more than 3 months of imports. Should the oil prices drop sharply, gross foreign exchange reserves are likely to be under renewed pressure as the central bank continues de facto to maintain a fixed exchange rate even if the de jure exchange rate arrangement is classified as free-floating.
Public finances in better shape following double shock of oil prices and banking sector crisis
Public finances were also hit hard by the sharp drop in oil prices – as oil revenues accounted for a large share of public revenues – and by the banking sector crisis. Public debt including guarantees surged form 11.2% of GDP in 2014 to around 50% in 2019. The surge is largely explained by the 2015 devaluations and the surge in guarantees is related to banking sector restructuring, the construction of the Southern Gas corridor and other infrastructure projects as public debt excluding guarantees equalled about 20% in 2019. Since 2014, the authorities have approved a public financial management reform that includes the adoption of a fiscal rule in 2019 and a public-debt management strategy. The large number of State-Owned Enterprises (SOEs) (more than 5,000) could represent an additional fiscal burden. Indeed, past devaluations, sluggish growth and poor governance have weakened the financial position of most SOEs, which required larger budget support. Despite the authorities’ effort to monitor SOEs and strengthen financial accounting practices, more progress is needed to reduce the contingent liabilities arising from SOEs.
Following the drop in oil prices, non-performing loans surged leading to a banking sector crisis. The authorities had to intervene to close some banks and recapitalise other banks. The International Bank of Azerbaijan (IBA) was one of the banks that had to restructure its debt, which led to losses among its creditors. IBA still does not have a viable business model. That being said, the situation in the banking sector has stabilised and de-dollarisation is ongoing. Nevertheless, the banking sector remains fragile. Weaknesses in banks’ balance sheets persist as some banks remain undercapitalised with high NPL and related-party lending. Hence, some banks might still be closed and others might still be recapitalised.
The sharp drop in oil prices hit the Azerbaijani economy hard. Real GDP growth was in negative territory in 2016, the current account balance turned into a deficit, external debt increased sharply and the banking sector was seriously hit. Moreover, gross foreign exchange reserves plunged as the central bank tried to avoid a(n) (unavoidable) devaluation. That being said, despite the somehow long-lasting impact of the lower oil prices on the Azerbaijani economy, Credendo decided to upgrade the country’s MLT political risk to category 4/7 (from 5/7). Indeed, although public finances and the financial situation are worse than in 2014, they have been improving since the oil price shock of 2015. Last but not least, Azerbaijan is a net external creditor.
Analysts: Pascaline della Faille – P.dellaFaille@credendo.com
MLT political risk rating upgraded from 6/7 to 5/7
Interventionist economic policies are likely to continue
Nigeria is Africa’s biggest oil producer and has the largest proven reserves in the region, after Libya. Not surprisingly, the country is very reliant on the oil sector. In 2018, oil accounted for 62% of exports and 58% of government revenues. The lack of diversification exposes the country to the risk of fluctuations in global oil prices and oil output disruptions resulting from instability in the oil-producing regions. The fall in oil prices – in combination with years of mismanagement – hit Nigeria particularly hard in 2016. The country is still recovering from this oil price shock (see graph 1). Real GDP growth of respectively 2.3% and 2.5% is expected for 2019 and 2020, a rate below population growth. President Buhari’s response to the oil price shock was the introduction of interventionist economic policies. These policies, however, hinder economic growth and restrain foreign investment. Indeed, capital controls and the Central Bank of Nigeria’s interventions obstruct transfers and limit foreign exchange availability in the market. In addition, import restrictions on a significant number of goods still cause disruptions and supply shortages. For example, Buhari’s government promoted a nationalistic vision of agriculture self-sufficiency in the production of rice, millet, sorghum, maize, soybeans and wheat. Ever since, agriculture GDP growth has slowed while the output gap encouraged informal food imports (smuggling) and hikes in food prices. As Buhari won a second four-year presidential term in February 2019 by a decisive margin, these interventionist policies are expected to continue.
Liquidity position has strengthened but remains under pressure
As illustrated in graph 2, the West African country experienced a small current account deficit in 2015, followed by a surplus in 2016-2018; and it is set to reach a minor deficit over the coming years (of about -0.1% to -0.2% of GDP). Whereas gross foreign exchange reserves were under severe pressure in 2014-2016, liquidity levels have recovered supported by higher oil prices, large Eurobond issuances and the fact that more hard currency is available in the market. More recently, volatile hot money inflows have also been feeding liquidity levels, although these speculative capital flows incite market instability as they move very quickly in and out of the market. The improved liquidity situation led to an upgrade of the ST political risk from category 6/7 to 5/7 in June 2018. That being said, the official naira is not floating freely and is kept stable around 305 naira/USD by selling foreign exchange. This is putting Nigeria’s liquidity under constant downward pressure and causing exchange-rate misalignment. Especially as the current account balance is expected to be in negative territory in the coming years, the naira peg and foreign exchange reserves will remain under pressure. As a result, foreign exchange reserves (standing at 5.5 months of import cover in October 2019) are likely to shrink in the coming months to years.
Public finances are relatively healthy
Inflation has fallen since the 2016 peak (18.5%) thanks to tighter monetary policies, although it remains above target (projected around 12% in 2019 and 2020). This is partly explained by the central bank’s continued fiscal deficit financing. Nigeria’s fiscal deficit is expected to be slightly above 4.5% of GDP over the next few years, leading to a steady accumulation of public debt. However, thanks to the country’s very favourable starting point (public debt at 27.3% of GDP in 2018), total public debts are only projected to reach a sustainable 36% of GDP by 2023. Nigeria’s main fiscal weakness lies in its government-revenues-to-GDP level, which – at around 8% – is among the lowest in the world. It is explained by the limited non-oil tax base, lower oil revenues since 2015 and weak institutional capacity. This reflects the failure of subsequent governments to implement vital structural reforms. It also poses severe risks to domestic-debt obligations as limited revenues frequently lead to a significant accumulation of public arrears. Nonetheless, the long-term fiscal indicators are favourable in general.
Limited financial burden
Nigeria is enjoying a low external-debt level compared to the size of its economy. In 2014, external debt was estimated at 8.3% of GDP in the latest IMF report of April 2019 – a very low level. External debt has swollen in the past years owing to debt issuance and the weakening of the naira in 2015-2016. That being said, it was projected at around 16% of GDP at the end of 2019 – still a low level. In the coming years, nominal external debt is likely to continue to grow, mainly due to public-debt issuance, but below the level of GDP growth. Therefore, the external-debt-to-GDP ratio is likely to decrease in the coming years. In addition, the external debt service poses a limited financial burden. Indeed, despite the severe terms-of-trade shock and obvious difficulties confronting the country, Nigeria has managed to keep its medium- to long-term debt profile at sustainable levels.
Manifold internal conflicts remain an important weakness
There are still many conflicts within the country, driven by multiple factors. Firstly, ethnicity remains an important driver of conflict. Nigeria is one of the most ethnically and linguistically diverse countries in the world with over 300 ethnic groups and over 500 different languages. Secondly, religion is an important fault line in the country. Muslims live predominantly in the north and Christians mainly in the south. Boko Haram – an infamous example of a religious conflict – continues to destabilise the northeast. Furthermore, under an informal agreement between Nigeria’s rulers, the presidency has rotated between the Christian south and the Muslim north. While it has no legal standing, any attempt to violate it could stoke political tension. Thirdly, climate change is also an important source of conflict. The rapidly increasing desertification (in combination with ethnic tensions and poverty) has led to conflicts between farmers and nomadic herders in the Middle Belt, which have been intensifying in the past years. In addition, oil exploitation and revenue sharing in combination with the pollution of the environment have frequently been a source of friction as illustrated by the regular Niger Delta pipeline attacks. Lastly, pressing social problems, including the huge youth unemployment and poverty, increase the security risk in general as demonstrated by the many kidnappings, omnipresent banditry and cattle rustling in the country.
The lack of viable long-term solutions and rising demographic pressures – Nigeria is Africa’s most populous country – mean occasional reciprocal bouts of violent unrest are very likely. It remains to be seen whether sufficient government resources will be made available for stemming the surge of violence. The numerous security crises seem to be beyond the federal government’s managerial competence due to endemic corruption and the absence of government control in several regions of the country.
Upgrade of the medium- to long-term political risk classification from 6/7 to 5/7
The country’s reinforced liquidity position in combination with the ongoing low external debt-stock and debt-service ratios, have led to an upgrade of Nigeria’s medium- to long-term political risk classification from category 6/7 to 5/7. That being said, the fragile political situation, interventionist policies (import restrictions, capital controls and exchange-rate misalignment), overreliance on the volatile oil sector and severe security risks still pose important weaknesses.
Analyst: Jolyn Debuysscher – email@example.com
MLT political risk rating upgraded to 2/7 thanks to improved political and financial situation
Political stability strengthened since the electoral shock of 2018
The political context has changed completely since May 2018 when the long-ruling Barisan Nasional coalition (BN) was unexpectedly defeated in the general elections. It was the first time since Malaysia’s independence in 1957 that the power was transferred to the opposition. The four-party Pakatan Harapan coalition (PH) won with a small majority of the seats (121 out of 222) ahead of BN. Mahathir Mohamad, former PM from 1981 to 2003 and father of the country’s successful economic transformation, became the new PM. Although the now 94-year-old PM pledged to hand over his PM position to ex-opposition leader Anwar Ibrahim – who was released from prison in June 2018 – by May 2019, he might remain in power until the 2023 legislative elections if his health allows it. BN’s sharp defeat had much to do with former PM Najib’s alleged corruption and financial scandals during his long premiership. One of those was his syphoning off of the state investment fund 1Malaysia Development Berhad (1MDB) for which he is currently under trial. Moreover, people blamed his government for the rising cost of living and widening social inequalities.
Since he returned to power, Mr Mahathir has made progress around three electoral promises. In the anti-corruption fight, he launched former PM Najib’s ‘1MDB trial’. Secondly, he pushed for the removal of the BN’s controversial ‘anti-fake news’ law. The law was introduced last year to crack down on political opponents and is expected to be removed in 2020. Lastly, he successfully renegotiated a large Belt and Road Initiative (BRI) railways contract and suspended China’s high-speed train project linking Kuala Lumpur to Singapore. These decisions have been a popular win for Mahathir.
On the other hand, he refrained from moving forward in the politically sensitive reduction of ethnic polarisation – which deepened under Mr Najib’s premiership – as racial laws continue to grant the Malay majority a preferential status under many aspects. To maintain this support, PM Mahathir is opting for the status quo, which is a source of rising tensions within the ruling multiracial PH coalition. Still, in the coming years under this government’s rule, one can expect policy continuity because the government will be pursuing a pro-free-trade-and-business stance and focusing on macroeconomic stability. Unlike the previous administration, improving public governance should remain part of the current government’s plans.
Regarding political violence (risk rated in category 2/7), beside sporadic ethnic tensions between Malays and Chinese/Indian minorities, there is a persisting risk of terrorist attacks from Islamist militants. There is a high risk for ‘IS returnees’ and/or IS-linked local networks attempting to attack public places and western targets in the coming years. All in all, the risk is mitigated by effective counter-terrorism intelligence.
Economic resilience amid a weakened external trade environment
Malaysia keeps displaying economic resilience in spite of external shocks. After a sharp drop in oil prices in 2015-2016, the country has been hit by the escalated US-China trade war and its negative impact on global demand and trade since 2018. Yet, the export-led Malaysian economy has somewhat managed to resist external headwinds thanks to diversified exports and robust domestic consumption. GDP growth reached an average 4.6% in 2018-2019, total exports roughly stabilised and the current account surplus strengthened as imports contracted. Like the rest of the region, a continued slight economic deceleration reflecting a weakened manufacturing sector is expected this year whereas global trade uncertainties and the structural Chinese slowdown cloud the medium-term outlook.
Nonetheless, Malaysia’s prospects remain positive on the back of resilience, good fundamentals and continued support for free trade in Asia. Looking ahead, the potential ratification of the ‘Regional Comprehensive Economic partnership’, a free-trade deal mainly gathering ASEAN countries and China, is likely to boost intraregional trade in the future. In the MLT, Malaysia’s GDP growth is forecasted to be just below 5%, its current account surplus to shrink slowly below 2% of GDP and its balance of payments to be comfortably positive. In the future, Malaysia remains exposed to investor risk aversion and global financial market volatility, especially as the outlook is gloomier on the trade and economic front. The return to political stability, renewed US monetary easing and Malaysia’s economic robustness – reflected by a stabilised ringgit – have nevertheless reduced risks of financial instability and large capital outflows.
As for public finances, the moderate fiscal deficit increased to 3.6% of GDP in 2018 but has since then been on a declining trend. With a government committed to fiscal consolidation, the fiscal deficit is expected to end up below 3% in the MLT. The main uncertainty and concern is about the public debt. It is moderate, expected at 56% of GDP this year, but could be higher than reported when including PPP-lease payments and undisclosed government guarantees to various entities such as 1MDB. Hence, government debt could reach up to 80% of GDP. It reinforces the government’s willingness to reduce the public debt burden, notably through a privatisation plan for some SOEs but also for part of the civil service. Under the current government, both public revenues and spending are forecasted to shrink which, among other things, will lead to a further increase in the public-debt-to-government-revenues ratio to around 315% next year. Beside public debt, private debt remains high and could weigh on MLT growth. This being said, household debt and non-financial corporate debt, both around 68% of GDP in Q2 2019, are on a slow downward trend and their low share in USD mitigates the potential impact of a weaker ringgit.
External debt at more a sustainable level
Malaysia’s financial risk has seen a notable improvement since Credendo downgraded the country in 2016. External debt ratios and trajectory, including for ST debt, were indeed significantly revised downward. In 2015, external debt was close to 75% of GDP. Since the IMF debt revision, it was expected to end 2019 slightly above 50% of GDP and to slowly come down further in the MLT. Also, Mahathir’s renegotiation of a BRI project (cf. supra) last April will contribute to slightly improving the country’s external debt sustainability as the Chinese loan related to the ‘East Coast Rail Link’ was cut by more than a third (from USD 16 bn to 11 bn) whereas Malaysia finally got a 50% stake in operating the railways. As for ST debt, it has been close to 25% of current account receipts over the past two years, i.e. well below the level that was estimated to be around 40% in 2015. Taking also into account the adequate foreign exchange reserves covering close to 5 months of imports, the liquidity position remains good.
Considering those developments, particularly the improvements in the political and financial situation while Malaysia has been showing overall economic resilience in a sluggish global trade environment, Credendo decided last December to upgrade Malaysia’s MLT political risk rating from category 3/7 to 2/7.
Analyst: Raphaël Cecchi –firstname.lastname@example.org
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