KUALA LUMPUR,. RAM Ratings has revised Malaysia’s fiscal deficit expectations for 2018 to 3.2 per cent of the Gross Domestic Product (GDP), which is a still-manageable level from 2.8 per cent previously.
It said fiscal gains derived from the new administration’s cost rationalisation exercises and higher oil and gas-related earnings will mitigate the impact of revenue foregone from the abolition of the Goods and Services Tax (GST) and reinstatement of retail fuel price subsidies.
“Nevertheless, the government may still be able to meet its initial fiscal deficit target of 2.8 per cent of GDP in 2018, given possible higher dividend revenue from government-linked entities and the pragmatic approach to implementing several of the administration’s pledged 100-day policy changes,” it added.
Over the next few years, Malaysia’s fiscal deficit is expected to remain contained at around three per cent of GDP due to revenue constraints and the significant costs of various election promises, it said in a statement here, today.
RAM Rating said the fulfilment of these pledges, which includes a medical scheme for marginalised households, the reinstatement of retail fuel subsidies and introduction of co-payment systems for minimum wage increases and housewives’ pensions (Suri Incentive programme), is estimated to amount to 0.8 per cent of GDP and anticipated to accelerate long-term fiscal expenditure growth.
Potential compensation payments amid reviews of large infrastructure projects and likely long-term developments regarding motorway tolls may similarly impose further costs.
Elsewhere, the level and structure of Malaysia’s fiscal revenue continue to be an issue.
The level of fiscal earnings — at an estimated 15.7 per cent of GDP for 2018 — is low compared to regional peers’ (Thailand: 21.1 per cent, Singapore: 20.2 per cent).
Furthermore, Malaysia’s revenue structure will be more concentrated on oil and gas-related earnings (19.0 per cent of total revenue in 2018, up from the budgeted 15.7 per cent) as the substitution of the GST with the Sales and Service Tax regime is not envisaged to yield the same quantum of fiscal revenue.
“This would increase Malaysia’s revenue volatility as it becomes more exposed to fuel prices and exchange rate movements, both of which may be affected in the near-term amid a possible intensification of a global trade war this year.
“In our view, a potential solution might lie with a holistic review of the current tax regime,” RAM said.
Government on-balance sheet debt, which stood at RM725.2 billion (52.1 per cent of GDP) as at end-second quarter of 2018, up from RM686.6 billion (50.8 per cent of GDP), is elevated relative to regional peers.
As at end-2017, total outstanding government guaranteed debt stood at RM238.2 billion, some of which RAM opines does not pose a risk to the fiscal position.
Additionally, the current administration has included RM201.4 billion (or 14.9 per cent of GDP) of committed PPP payments as part of its debt calculations.
The current administration’s intention to pare down its debt by RM200 billion reflects its long-term fiscal orientation and is viewed positively.
According to RAM, the government aims to achieve this debt reduction target via the sale of non-core assets in the short term.
“Over the long term, decreasing the costs of large infrastructure projects will likewise stem any uptick in future indebtedness. While implementation and market risks associated with these activities are potential concerns, continued alleviation of Malaysia’s debt burden would significantly improve its long-term fiscal sustainability,” it said
Notably, Malaysia’s debt-servicing capability is relatively weak, given that it is expected to spend an estimated 13.7 per cent of revenue on debt service payments in 2018 (2017: Thailand, 4.8 per cent; Indonesia: 13.1 per cent).
Malaysia’s respective sovereign ratings on the global, Asean and Malaysia national scales of gA2/stable/gP1, seaAAA/stable/seaP1 and AAA/stable/P1 remain anchored by strong macroeconomic fundamentals, but are moderated by relatively weak fiscal metrics.
RAM’s key concerns are prolonged slower domestic investment growth amid recent changes to policies, potential increases in debt to revenue and debt service to revenue ratios due to the absence of new revenue sources and a lack of traction in fiscal efficiency gains from ongoing cost rationalisation exercises.