KUALA LUMPUR: Malaysia's budget deficit is expected to climb to six per cent to 6.5 per cent of gross domestic product (GDP) this year, Malaysian Rating Corp Bhd (MARC) said.
This will be due to the declining revenue as well as rising expenditures to finance various stimulus packages introduced to support the economy.
MARC also expects the country's GDP to decelerate further in the second quarter (Q2) of 2020 after posting a sharp slowdown in Q1 (0.7 per cent growth).
The rating agency said the overall growth for 2020 would be between -1.5 per cent and -3.0 per cent due to the worldwide impact of the Covid-19 pandemic.
MARC said an economic recovery can be expected in 2021 with GDP growth of between 6.2 per cent and 6.7 per cent.
"Our budget deficit forecast also assumes some revenue enhancement measures of one per cent to 1.5 per cent of GDP, via government-linked companies and Bank Negara Malaysia, among others," its chief economist Nor Zahidi Alias said in a report today.
Nor Zahidi said with higher budget deficits, the government's domestic debt level would surpass the 55 per cent self-imposed threshold in 2020.
He expects the government's domestic debt level to be at 56 per cent to 60 per cent of GDP.
The plus point, however, was that only three per cent of the government debt is in foreign-denominated currency, he said.
Concurrently, the increasing budget deficits and government debt will weigh on Malaysia's sovereign credit rating.
"Two out of three major international credit rating agencies (CRAs) have adjusted Malaysia's sovereign credit rating outlook to 'negative' from 'stable'.
"Going forward, however, a quick and sustainable recovery in global crude oil prices and credible medium-term revenue-enhancing measures by the government will mitigate some of the pressure," Nor Zahid said.
Meanwhile, MARC expects a slim possibility of further reductions in the Overnight Policy Rate (OPR) this year after Bank Negara Malaysia lowered it to a historical low of 1.75 per cent on July 7.
It said the resumption of global economic activities in second half of 2020, although not at full capacity, would change the general pessimistic view towards the end of the year.
"Notwithstanding this, a major risk will be the emergence of a second wave of the pandemic," it added.
On the ringgit, MARC said the local currency would benefit from the weakening US dollar as global economic prospects improve and crude oil prices rebound.
Besides that, he increasing inflows of portfolio capital into the local bond market will add to the strength of the ringgit.