KUALA LUMPUR: The 2020 Budget contains modest fiscal easing of the deficit target in response to increased economic growth risks, but does not represent a significant shift in Malaysia's consolidation efforts, Fitch Ratings says.
The international ratings agency said the new fiscal targets were slightly looser than its expectations when affirming Malaysia's sovereign rating at 'A-'/Stable in July.
However, they did not fundamentally change the medium-term fiscal outlook.
The budget tabled on October 11 was the second since the Pakatan Harapan coalition came to power in May 2018's general election.
It targets a 2020 fiscal deficit of 3.2 per cent of gross domestic product (GDP), revised from three per cent.
The government expects to meet this year's 3.4 per cent target, and projects deficits to average 2.8 per cent over the medium term.
“These medium-term targets are consistent with reducing Malaysia's high public debt, which is a sovereign rating weakness, although the reduction may be slightly delayed,” Fitch said in a statement today.
The government estimates general government debt to GDP has risen to 65.1 per cent in June this year (including committed guarantees serviced from the budget, and 1Malaysia Development Bhd debt) from 62.6 per cent in December 2018.
The firm said the rise in the debt ratio was due to an increase in committed guarantees for the continuation of infrastructure projects and the bail-outs of Tabung Haji, a financial institution that provides services to hajj pilgrims, and the state-owned Federal Land Development Authority.
“As a result, it will take longer - and require more consolidation efforts - to bring debt closer to the 'A'-category median of 48 per cent of GDP.”
Fitch said the coalition's first budget in November last year featured much bigger near-term deficit target revisions, with the 2018 deficit increased to 3.7 per cent from 2.8 per cent.
“These did signal weaker headline consolidation goals from the new government, although they were in part also caused by moves to boost fiscal transparency by bringing some one-off expenditure items on budget.
“Nevertheless, fiscal credibility could suffer if consolidation were to be repeatedly delayed, for example from difficulties in raising enough revenue to offset shortfalls from the Goods and Services Tax, which was repealed after the 2018 election.”
Overall, Fitch said the 2020 Budget balanced fiscal consolidation with a desire to support GDP growth, which it forecast to slow to 4.5 per cent in both 2019 and 2020 from 4.7 per cent in 2018.
It added that global trade tensions were weighing on growth, particularly as Malaysia is a small, open economy integrated into Asian supply chains.
A mitigating factor is Malaysia's well-diversified export base, both by product and by geographical destination.
“We think this can help maintain relatively strong growth, although the government's forecasts that GDP will increase by 4.7 per cent this year and 4.8 per cent next year may be moderately optimistic.
“However, fiscal risks in 2020 from slower-than-forecast growth are limited by the budget's conservative revenue growth target of 4.8 per cent, adjusted for last year's special Petronas dividend.”