OREANDA-NEWS. The upward revision to Malaysia's 2015 fiscal deficit target amid sharply falling crude oil prices shows that the country's dependence on petroleum-linked revenues remains a key sovereign credit weakness, says Fitch Ratings. Fitch maintains a 'Negative' outlook on Malaysia's long-term issuer default ratings, which means that we are more likely than not to downgrade the ratings within the next 12-18 months. Fitch expects to conduct a full review of Malaysia's ratings before the end of July 2015.

The government cut its 2015 GDP growth forecast on 20 January 2015 to 4.5-5.5%, from 5-6%, while the deficit target was raised to 3.2% of GDP from 3%. Malaysia's macroeconomic outlook has deteriorated after the greater-than-50% drop in international oil prices since June 2014. The country is the largest net exporter of petroleum and natural-gas products in south-east Asia, with petroleum accounting for roughly 30% of fiscal revenues.

Fitch has said before that slippage in the government's fiscal targets would be credit negative for the country. These revisions underscore the vulnerability of Malaysia's economy and credit profile to sharp movements in commodity prices; the high share of revenues linked to oil- and gas-linked revenues is a structural weakness for the sovereign.

The sharp decline in energy prices also is likely to have an impact on Malaysia's external accounts. While Prime Minister Najib Razak has stated that he expects the current account to remain in surplus, the risks to the surplus are to the downside. The emergence of twin fiscal and current account deficits will remain a rating sensitivity for Malaysia. Such a scenario would risk greater volatility in capital flows to a degree that could become disruptive for the economy. Malaysia's external liquidity has already weakened - official reserves declined USD16bn (12%) between August and December 2014.

The government reiterated in its budget update that fiscal reform and consolidation will continue, despite the increasingly uncertain macroeconomic outlook. However, with the upward revision to the 2015 deficit target, Fitch maintains that further consolidation measures might be required to meet the government's target of achieving a balanced budget by 2020.

Malaysia's rising contingent sovereign liabilities also are likely to remain a credit weakness. The financial position of 1Malaysia Development Berhad (1MDB) - a state-owned investment company - has become a source of uncertainty. Fitch views 1MDB as a close contingent liability of the sovereign because of the nature of its operations and leadership, as well as explicit sovereign guarantees of some MYR5.8bn of the entity's MYR41.9bn debt (at end-March 2014).