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HONG KONG, Sept 1 (Reuters) - Malaysia's deteriorating currency position - reflected in the ringgit's sharp depreciation, falling foreign exchange reserves and shrinking current account surplus - could force Fitch Ratings to restore the negative outlook attached to the country's credit rating, it said this week.
The warning comes a week after rival Moody's Investors Service said clouds were gathering over its positive outlook on Malaysia's A3 rating because of political risks, weak commodity prices and the threat posed by China's economic slowdown.
Fitch said recent political uncertainty was in line with Malaysia's relatively weak governance ranking.
On June 30, Fitch bumped the outlook on Malaysia's 'A-' sovereign credit rating up to "stable" from "negative". The decision had been a "close call", said Andrew Colquhoun, Fitch's Head of Asia-Pacific Sovereigns Rating.
"In June we put more weight on the structural improvements, but the weights aren't fixed. Continued erosion of external liquidity in the context of deteriorating investor risk appetite could eventually lead us to change our assessment again," said Colquhoun.
On July 3 a political storm erupted over a Wall Street Journal article on debt-laden state fund 1MDB stating that almost $700 million from 1MDB had been deposited in Prime Minister Najib Razak's bank account.
Najib has denied any wrongdoing, saying that he has not received money from 1MDB or any state agency for his personal gain. Malaysia's anti-graft agency has said the funds were a political donation from a Middle East Arab family.
Since the 1MDB storm broke over Najib's premiership, the ringgit has lost 10 percent of its value, plumbing levels unseen since the depths of the Asian financial crisis in the late 1990s. Foreign currency reserves have dropped $11 billion since the end of June to $94.5 billion on Aug. 14 - the lowest level for six years.
The current account surplus has shrunk from a peak in 2008 to 7.6 billion ringgit in the second quarter this year, down from 10 billion in the previous quarter.
While there have been investor concerns around Malaysia's declining current account surplus, triggering portfolio outflows, the fallout from the 1MDB scandal enveloping Najib has amplified investor unease in a country with ongoing governance concerns.
Colquhoun said that the debt run up by 1MDB did not constitute a major risk in itself, but there were dangers that controversy would distract policymakers.
"I think the main impact investors I speak to are worried about is the potential for the issue to take the government's collective eye off the ball of the economy and undermine reform momentum," he said.
Colquhoun said there was no evidence of that.
Reporting by Umesh Desai