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Nomura downgrades Malaysian shares to "underweight"

Nomura downgrades Malaysian shares to

Japanese bank Nomura raised concerns about Malaysia?s finances on Wednesday after it downgraded the country's shares from "neutral" to "underweight."

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11.01.2019 01:23 AM

Japanese bank Nomura raised concerns about Malaysia's finances on Wednesday after it downgraded the country's shares from "neutral" to "underweight."

In its latest annual report, Nomura said that the new Malaysian government has not pushed through enough reforms during the last six months and that its failure to make significant moves could have a detrimental impact on its fiscal position in 2019. The financial holding giant also warned of a potential fall in credit ratings.

Malaysia's Prime Minister, Mahathir Mohamad, became the world's oldest elected leader when he won a surprise election over his former party, Barisan Nasional, last year. The 92-year-old came to power in May, replacing Najib Razak, whose administration faced accusations of fiscal mismanagement.

Mahathir's policies have been under the spotlight due to the fallout, and Nomura noted in its report that there "has not been a significant reform push" in recent months. This inaction means that Malaysia will find it more challenging to drive "expansionary economic activity" this year, according to the bank.

Nomura also claimed that Malaysia's listed companies are delivering lackluster earnings when compared to regional peers, which makes it a less attractive outlet for global investors. The bank is not the only one to flag downside risks for Malaysian shares, as Singapore bank DBS issued a similar downgrade earlier this week.

"On [the] reforms front, we were hoping that the government would deliver more progress in areas to improve government efficiency, reduce corruption and crony capitalism and potentially roll back or ease the government's presence in some areas to promote and create a level playing field with the private sector," Nomura said in its report.

Reforms were not the only factor in Nomura's downgrade, however. It also said that revenue could see negative effects from the recent drop in oil prices and "populist moves," including Mahathir’s decision to repeal an unpopular tax on goods and services last summer.

Nomura now expects Malaysia's fiscal deficit to be wider than government forecasts. The bank has tipped the deficit to come in at 3.9% of gross domestic product (GDP) for last year, which is higher than the 3.7% estimate, before contracting slightly to 3.7% in 2019.

In its conclusion, Nomura warned of other "high" risks, including a possible slip in sovereign ratings. The bank said: "Our economists believe there is a high risk of fiscal slippage and the possibility of a sovereign ratings downgrade that could trigger more capital outflows."

Ratings agency Moody's appeared to echo some of the concerns outlined in Nomura's latest report. On Tuesday, Moody's said that it may downgrade Malaysia's sovereign rating soon if there is evident concern about its financial prospects or an uptick in its debt burden. "We would consider downgrading the rating if Malaysia's fiscal prospects weaken or its debt burden increases," Moody’s said in its annual analysis.

However, it did say that a rating upgrade could be possible if the Malaysian government manages to reel in its deficit. Moody's said that Malaysia’s current stable A3 rating is indicative of the country's large and diversified economy, and while downward pressures are increasing, it is retaining a healthy growth outlook in the medium term.

The ratings agency added: "The relatively high government debt is partly offset by a favorable debt structure and large domestic savings." Moody's now expects Malaysia's real GDP to cool after a sustained period of 5% growth due to the pressure of trade protectionism and a potential slowdown in public spending.

Additionally, Moody’s said that the Malaysian government’s new fiscal policies, such as the removal of the goods and services tax, may undermine its effectiveness and could disrupt the previously steady trend of deficit reduction.  

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