MPP1123: FINANCIAL ANALYSIS

CASE STUDY: CREDIT RATING

MOHD SHAHRUL NAIM BIN ZULKIFLI

KKP 23002
CASE STUDY: CREDIT RATING

Moody's Investors Service is a renowned credit rating agency that assesses the creditworthiness of
governments, corporations, and other entities. Its ratings provide valuable information to investors
regarding the credit risk associated with investing in a particular entity's debt securities. As refer
to Press release on 14th April 2023, Malaysia’s Sovereign Credit Rating has been marked at A3
which brings to outlook stable condition. This rating is a reflection of the country’s determination
to sustain economic growth momentum and resilience amidst highly challenging global conditions
and uncertainties.

A credit rating is essentially an educated opinion by a credit rating agency of how financially solid
a particular entity is and how likely it is to be able to repay its debts. Investors can use that
information in deciding whether to buy the securities issued by that entity and whether they will
be adequately compensated for the level of risk involved. Investors can also compare the ratings
issued to different entities or to different securities offered by the same entity.

As a consequences, Investors and lenders use credit ratings to decide whether to do business with
the rated government as well as to determine how much interest they would expect to receive to
compensate them for the risk involved. For example, bonds issued by a government with a high
credit rating are likely to pay less interest than those issued by one with a lower rating. In the case
of the Malaysian government, Moody's ratings can have several impacts on investors.

One of the impacts towards investor is borrowing costs. The rating assigned by Moody's affects
the interest rates at which the Malaysian government can borrow funds from the international
capital markets. A higher rating implies lower perceived risk, enabling the government to issue
debt at more favorable interest rates. This reduces borrowing costs and can result in savings for
the government.

Besides that, the other impact is the assurance of safety towards investment. High credit ratings
give assurance to the investors about the safety of the investment and minimum risk of default.
Credit rating also act as an indicator of the Malaysian government's financial stability and ability
to meet its debt obligations. A higher rating fosters investor confidence, as it suggests a lower
probability of default. This can lead to increased demand for Malaysian government bonds and
other debt instruments, benefiting the government by expanding its investor base.
Credit ratings play a role in determining the Malaysian government's access to international capital
markets. A good rating enables the government to tap into a broader range of investors globally,
providing greater liquidity and funding options. It can also enhance the government's ability to
issue bonds in foreign currencies, further diversifying its funding sources.

Overall economic performance also one of the indirect impacts from Moody’s credit ratings.
Positive ratings can bolster investor sentiment, attract foreign direct investment, and contribute to
economic growth. Conversely, a downgrade in ratings may signal increased risk, leading to capital
outflows, reduced investment, and potential negative effects on the economy.

Then, the credit ratings influence investors' perception of Malaysia as an investment destination.
A higher rating indicates a lower credit risk and enhances the country's appeal to investors. It can
attract foreign investment, encourage portfolio diversification, and lead to lower borrowing costs
for the government
There are several factors influence the credit rating assigned to a government. These factors are
evaluated the entity’s financial history and future economic potential based on the country's
economic performance, fiscal health, political stability, and other relevant indicators.

One of the factors that influence the credit rating is financial health assessment. Credit rating
agencies will analyze financial reports, including balance sheets, income statements, and cash flow
statements, to evaluate the financial health of an entity. These reports provide information about
the company's profitability, liquidity, leverage, and overall financial stability. Positive financial
indicators, such as strong revenues, healthy profit margins, and a robust balance sheet, can result
in a higher credit rating.

Morover, GDP growth is closely linked to investor confidence. When a country exhibits healthy
GDP growth rates, it signals a positive business and investment climate. Strong economic growth
attracts domestic and foreign investment, driving economic expansion further. Higher investor
confidence can enhance a country's creditworthiness and may result in higher credit ratings.

Next, the factor that influence the credit rating is fiscal position of a government. Fiscal health
plays a crucial role in determining its credit rating. Factors considered include the government's
budget deficit, public debt levels, and the ability to manage fiscal imbalances. A sustainable fiscal
policy and a track record of prudent debt management are seen as positive indicators.

Besides that, institutional framework also contribute to the credit rating of a government. The
strength of a country’s institutions, including its legal system, regulatory framework, and
effectiveness of governance, is considered in credit assessments. Sound institutions enhance
investor confidence and contribute to a higher credit rating.

Last but not least is political stability. The stability of political environment is a significant factor
in credit assessments. Rating agencies analyze the country's political institutions, governance
framework, and the likelihood of policy continuity. Political stability provides confidence to
investors and supports a favorable credit rating.

It's important to note that credit rating agencies use their own methodologies and criteria to assess
creditworthiness, and the weight given to each factor may vary. Therefore, while these factors
provide a general understanding, the specific methodologies employed by rating agencies should
be consulted for more precise insights into a government credit rating.
References:

Surendra, E. (2017). “Why Should Malaysians Pay Attention To The Country’s Credit Ratings?”

https://www.imoney.my/articles/credit-ratings-important-for-malaysia

(2019) Why is Credit Rating Important for Bond and Sukuk?

https://www.bixmalaysia.com/learning-center/articles-tutorials/why-is-credit-rating-
important-for-bond-and-sukuk