Sources: yahoo finance

KUALA LUMPUR (Dec 17): Fitch Ratings has affirmed Malaysia’s long-term foreign-currency issuer default rating (IDR) at BBB+ with a stable outlook, according to a statement on Monday.

“Malaysia’s ratings are supported by strong and broad-based medium-term growth, driven by robust domestic and foreign investments, and persistent current account surpluses with a diversified export base.

“These strengths are balanced against high public debt, a low revenue base relative to current expenditure, and weaker external liquidity relative to peers,” it said.

Fitch Rating expects Malaysia’s economy to expand by 5.2% in 2024, then slow to 4.5% in 2025, and 4.3% in 2026.

The rating agency said steady labour market conditions and an income boost from pay hikes for civil servants in December 2024 and January 2026 should support household spending.

This, coupled with growth, further underpinned by investments from government-linked companies and foreign investment related to supply-chain diversification.

“However, while Malaysia’s export performance has benefitted from the global tech upcycle in 2024, we expect momentum to slow in 2025 due to weaker external demand. Growth prospects also face downside risks from an escalation in geopolitical tensions,” it added.

Greater political stability, fiscal deficit narrowing

Fitch noted that Malaysia’s policy uncertainty has eased with a more stable ruling coalition formed in 2022, backed by a two-thirds parliamentary majority and an anti-hopping law preventing party switching.

This administration, it noted, has passed the Public Finance and Fiscal Responsibility Act 2023 (PFFRA), and is working on strengthening state-owned enterprise governance and the National Anti-Corruption Strategy 2024-2028.

“While improved policy certainty boosts investment, we believe coalition dynamics and diverse coalition partner interests still appear to constrain faster fiscal consolidation and tax reform,” it added.

The 2025 budget projects the federal government deficit to narrow to 3.8% of gross domestic product (GDP), from its estimated 4.3% in 2024.

“We expect 2025 federal government revenue/GDP to remain steady, from our 2024 estimate of 16.5%.”

New budget measures, including a tax on individual dividend income and enhanced sales and service tax, will bring limited additional revenue.

However, it said, this will be partly offset by lower petroleum-related revenue (18% of total revenue projected for 2025), given Fitch’s assumption that the Brent oil price will average US$70/bbl(barrel), against our estimate of US$80/bbl in 2024.

Meanwhile, Fitch also noted that the national oil company, Petroliam Nasional Bhd (Petronas) (BBB+/stable), is negotiating with state-owned Petroleum Sarawak Bhd over control of the natural gas distribution business in the state of Sarawak.

“Final arrangements are pending and could affect Petronas’ profitability and capacity to contribute to federal government revenue, including paying dividend, which will add around 1.5% of GDP in 2025.”

Meanwhile, the government aims to extend subsidy rationalisation to RON95 petroleum, education and healthcare, following savings from cutting electricity subsidies and targeting diesel subsidies.

“This will reduce spending on subsidies, but a large share of the savings will be channelled to additional spending, including increased social assistance for lower-income groups,” it added.

The government is also undertaking a review on civil service remuneration, including pay hikes in December 2024 and January 2026.

“We forecast the federal government deficit to decline to 3.5% of GDP in 2026, driven by continued subsidy rationalisation and modest tax increases. The government aims to reduce the deficit to below 3% in the medium term, as outlined by the PFFRA. We view this as a credible, gradual fiscal consolidation path.”

Source: Theedgemarkets

SAO PAULO/BRASILIA (Dec 16): Market anxiety dragged Brazil's real currency to a historic low on Monday, as significant central bank interventions again failed to counter market concerns over government spending.

The real closed at 6.09 per US dollar, with a year-to-date depreciation shaving off a fifth of its value, making it one of the worst performers among emerging market currencies.

Interest rate futures continued to rise, with bets that the central bank will hike its key borrowing rate again in January, likely by 125 basis points (bps), instead of 100 bps under its recent guidance.

The real opened sharply lower against the US dollar, as President Luiz Inacio Lula da Silva renewed criticism of what he sees as unreasonably high borrowing costs. The currency briefly pared losses after central bank interventions, before resuming its downward spiral.

In an interview with major television broadcaster Globo, aired late Sunday, the leftist leader dubbed the rate hikes "irresponsible" and said his government would "take care of that," hinting at potential policy changes ahead.

Next year, the central bank's rate-setting board will have a majority of members chosen by Lula, as the president is commonly known, including his pick for governor.

The Brazilian currency's steep decline was triggered last month by market disappointment over a much-anticipated government spending cut package.

Congress has yet to vote on the package a week before a scheduled recess. Even so, Finance Minister Fernando Haddad expressed optimism on Monday that approval for the package can be secured within this time frame.

Earlier in the day, the central bank announced a spot dollar auction that sold US$1.63 billion (RM7.25 billion), a move it had also deployed on Friday. The bank also sold the full US$3 billion in an auction, with repurchase agreements that it had announced on Friday.

Despite the efforts to boost the real, market sentiment remained sour after the central bank's rate hike earlier this month to bring the benchmark rate to 12.25%, while it signalled matching moves for the next two meetings.

"The only thing wrong in this country is the interest rate being above 12%. There's no explanation," said Lula, who was discharged from hospital on Sunday morning, following emergency surgeries to treat and prevent bleeding in his head.

Lula argued that inflation of around 4% is "fully controlled".

The central bank's hawkish move this month cited the market's negative reception of the fiscal package as a factor likely to pressure prices upward, with inflation expectations already drifting away from the bank's 3% target, plus or minus 1.5 percentage points.

A weekly bank survey of private economists released on Monday continued to point to higher inflation expectations moving into next year. Economists surveyed see the interest rate peaking at 14.25% in March.

Brazil's 12-month inflation ended November at 4.87%.

Lula has repeatedly criticised what he sees as excessively high interest rates, often slamming outgoing central bank governor Roberto Campos Neto. The president has tapped Gabriel Galipolo to replace him.

Next year, Lula's appointees will hold a 7-2 majority on the bank's nine-member rate-setting committee, up from the current 4-5 minority.

Uploaded by Liza Shireen Koshy

Source: Theedgemarkets

Dollar Resilience Bolstered by Inflation Data

Euro Struggles Against Policy and Market Sentiment

What’s Next for EUR/USD?

We expect the Bank of England (BoE) to keep the Bank Rate unchanged at 4.75% on Thursday 19 December in line with consensus and market pricing. We expect the vote split to be 8-1 with the majority voting for an unchanged decision and Dhingra voting for a 25bp cut. Note, this meeting will not include updated projections nor a press conference following the release of the statement.

Since the last monetary policy decision in November, data has broadly been in line with the MPCs November forecasts. Headline inflation has been slightly stronger than expected but importantly service inflation was in line with expectations. Similarly, private sector wage growth matched expectations printing at 4.8% y/y in the three months to September but with more apparent loosening evident in the labour market. While the disinflationary process is broadly on track, topside risks are evident in the latest PMI surveys only further amplified by the expansionary fiscal stance. Growth has been slightly weaker than expected in Q3 and with downside risks to the Q4 growth outlook. We note that we will receive a string of key data releases just ahead of the meeting on Thursday. The labour market report for October/November is published on Tuesday 17 December and November inflation data the day prior to the meeting on Wednesday 18 December. While we do not expect the incoming data this week to move the needle for the December meeting it will likely prove pivotal in terms of the monetary policy outlook in 2025.

BoE call. In 2025, we expect cuts at every meeting starting in February and until H2 2025 where we pencil in a slow-down in the easing pace to only quarterly cuts. This leaves the Bank Rate at 3.25% by YE 2025, which is lower than markets are expecting. We do however see the risk of the only gradual approach continuing in Q1 with a pause at the March meeting. Until data sufficiently warrants it, we think the BoE will be on steady course pausing at the meeting this week with service inflation and wage growth still elevated.

FX. We expect the market reaction to be rather muted upon announcement, barring any notable surprise in CPI on Wednesday altering the guidance. On balance, we tilt towards a dovish twist, which does suggest some slight EUR/GBP topside following the release of the statement. More broadly, we expect EUR/GBP to move lower in the coming quarters driven by BoE lagging peers in an easing cycle for the time being, UK economic outperformance and tight credit spreads. The key risk is more forceful policy easing from the BoE.