The ratings company cut the outlook on the A3 sovereign rating to stable from positive it said on Monday in a statement. The move brings its outlook into line with that of Standard & Poor's and Fitch Ratings with all three companies ranking Malaysia at their fourth-lowest investment grades.

Since Moody's assigned a positive outlook in November 2013 the government has sought to improve its finances rationalizing fuel subsidies and putting in place a goods and services tax the ratings company said. But the impact on the government's balance sheet has been limited and will remain so in part due to changes in the external environment it said.

“Those environmental changes have also undermined Malaysia's external position with large capital outflows a falling current account surplus sharp exchange rate depreciation and falling reserves” Moody's said.

The ringgit which was already weaker prior to the Moody's announcement amid general risk aversion related to China was 0.6 percent lower at 4.4120 a dollar as of 2:05 p.m. in Kuala Lumpur. The yield on the 10-year government bond was up three basis points to 4.25 percent. Read more