Narrow revenue base is one.
According to Moody's Investors Service, Malaysia faces the following credit challenges: 1) relatively high government deficits and debt, 2) narrow revenue base, relatively large subsidy bills, 3) weak domestic private investment, 4) regional competition in the electronics sector.
Meanwhile, the country's credit strengths include 1) strong external liquidity, 2) healthy balance-of-payments position 3) sound financial sector and prudent regulation, 4) favorable financing conditions.
Here's more from Moody's:
Malaysia's A3 government bond rating is based on our methodological assessment of moderate economic resiliency, supported by a highly open, medium-sized economy and a well-diversified external sector. However, economic growth has been relatively dependent on public-sector expenditure.
Although Malaysia's per capita income is lower than most rating peers, its indicators of governance, regulatory quality, and competitiveness are better than similarly rated countries.
The high degree of government financial strength is underpinned by the country's strong external position and high savings rates as compared to peers. The latter provides a substantial local currency and largely domestic source of financing for the fiscal deficit and government debt -- both of which, however, are higher than at comparably rated peers.
In particular, Malaysia's large stock of foreign exchange reserves provides a buffer against exogenous shocks that could otherwise undermine government finances.
Extensive price administration and low private investment have necessitated greater government spending on subsidies and infrastructure. Meanwhile, Malaysia's fiscal framework has grown more dependent on commodity revenues in the absence of broad tax reform. These developments have raised structural pressures.
The authorities have the institutional capabilities for advancing reforms, however, political willingness has been lacking.
Nonetheless, high fiscal financing requirements will be supported by a large pool of domestic savings, a liquid domestic investor base, and a strong net external creditor position.
Malaysia has strong and well-managed corporate and banking sectors; and its state-owned enterprises are undergoing reform. As a result, the sovereign's exposure to contingent liabilities is quite low.
Contentious domestic politics have slowed policy reform, but is unlikely to result in widespread instability.
The stable outlook on Malaysia's A3 sovereign rating balances the country's relatively healthy growth outlook and still formidable foreign exchange reserve buffer against its susceptibility to external demand.
Following the implementation of countercyclical measures in the wake of the global financial crisis, fiscal and debt ratios worsened and have yet to recover to pre-crisis levels. Nevertheless, funding conditions have not been adversely affected, while the government's debt profile remains favorable as compared to peers.
In January 2013, Moody's readjusted the country ceilings for Malaysia based on our assessment of moratorium risks given the country's ability and perceived willingness to service both its public and private cross-border debt obligations.
Malaysia's long-term foreign currency (FC) bond ceiling was thus raised to A1 from A3, while its longterm FC deposit ceiling remains unchanged at A3. The short-term FC bond and deposit ceilings also remain unchanged at P-1.
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