International ratings agency Standard and Poor's said Malaysia's sovereign credit ratings and outlook remained unchanged following the country's 2007 budget.

The agency's ratings for Malaysia's foreign currency were at A-/stable/A-2 while local currency rates A+/stable/A-1.

In an expansionary 2007 budget, the government said gross domestic product (GDP) was expected to reach 5.8 percent in 2006 and 6.0 percent in 2007.

It forecast the fiscal deficit to fall to 3.4 percent of GDP in 2007 from 3.5 percent in 2006.

S and P said the deficit forecast "underscores the gradual pace of fiscal consolidation that will continue over the next few years as the government adopts a pro-growth policy."

"Such a policy is not inappropriate given Malaysia's stage of development, although there are some risks associated with this slower pace of fiscal consolidation," said S and P's credit analyst Sani Hamid in the report, released yesterday.

Primary risk

The ratings agency said the primary risk would be a significant downturn in Malaysia's economic cycle, with the government having to respond by adopting additional fiscal stimulus to meet its growth target.

"This would worsen the country's fiscal position and debt levels," the report said.

It noted that Malaysia's general government deficit, at 2.9 percent of GDP in 2005, was above the current median of 0.2 percent for "A"-rated sovereigns.

Despite ongoing political tensions between Prime Minister Abdullah Ahmad Badawi and former leader Dr Mahathir Mohamad, the rating agency said it believed the premier's position remained tenable.

"We do not expect the situation to deteriorate to the extent that it will prove disruptive to the economy," Sani added.

Abdullah, who tabled the 2007 budget last week, announced a slew of incentives to promote Malaysia's bid to establish itself as a centre for Islamic finance.

The agency said that going forward, Islamic financial services were expected to expand even more rapidly.