S&P Global Ratings said Wednesday that the cohesiveness of the Malaysian government will remain a prime interest for investors.
The rating agency said in a report that a stable policy environment is an important factor that affects Malaysia's sovereign creditworthiness, while the other factor is its future fiscal performance.
"Political stability is an important question, since this is the first time that the Pakatan Harapan constituent parties are governing together," said S&P Global Ratings credit analyst KimEng Tan, adding that the ability of these parties to formulate and implement policies in a timely and effective manner is untested.
The bigger test of leadership transition lies ahead, according to the report. The 93-year-old Prime Minister Mahathir Mohamad has promised to hand over power to his former deputy Anwar Ibrahim in two years.
The agency highlighted that Malaysia's matured bureaucracy is likely to be a key stabilizer in any potential scenario of political instability.
"It has helped to keep the economy performing well through the major shocks of the past two decades," it said.
The coalition government's focus on governance is likely to take a while to benefit the policy and business environments in the country, the report added.
"We expect the government's decision to change the reporting structure of several important agencies to increase the independence and transparency of government agencies and state-owned enterprises," Tan said.
For a real change in behavior, the report opined that Malaysia will have to sustain these reform efforts, and it should even widen those measures to the civil service.
It does not expect Malaysia's fiscal performance to deteriorate materially in the next few years mainly because of the government's strong focus on fiscal stability.
Nevertheless, risks to fiscal performance have risen even if the government spends carefully, according to the report.
"With a narrow revenue base that is dependent on volatile revenue sources, the country's budget performance is more vulnerable to negative economic conditions than most others," it said.