KUALA LUMPUR: While the timing of Malaysia's next elections remains uncertain, the country's recent strong economic performance may facilitate fiscal consolidation following the ballot, Fitch Ratings said.
The rating agency said the likelihood of robust fiscal consolidation over the next parliamentary term could increase if the election delivers a large majority to a government committed to improving public finances.
"The current administration has already passed a law requiring a recall election to be held if a member of parliament opts to switch parties, although the law allows party blocs to change their allegiance collectively.
"This could improve longer-term political stability. However, other proposed reforms that have yet to be passed include a measure to limit prime ministerial terms and a Fiscal Responsibility Act that lays out a longer-term fiscal strategy," it said in a note today.
Fitch Ratings said that while a series of governments have reflected political instability since 2018, this has not prevented these governments from implementing policies and budgets.
This has, in turn, partly mitigated the impact of political uncertainty on Malaysia's creditworthiness.
"This could reflect the underlying strength of Malaysia's ministries and institutions.
"Nonetheless, successive changes in government have decreased visibility over the long-term direction of policy and appear to have reduced the scope for fiscal consolidation.
"Moreover, there is a risk that government effectiveness could weaken if political volatility is sustained," it added.
Fitch Ratings said the next government's medium-term fiscal strategy would be important from a rating perspective.
"When we affirmed Malaysia's ratings at 'BBB+' with a stable outlook in February 2022, we stated that a reduction in general government debt to gross domestic product (GDP), bringing the ratio closer to peer medians, for instance, through the implementation of a strong fiscal consolidation strategy, could lead to positive rating action.
"We think a shift to a more targeted subsidy regime is likely, whatever the election outcome," it said.
Fitch Ratings said the next government could also seek to reintroduce the Goods and Services Tax (GST), which might improve fiscal consolidation prospects.
However, it said such a move would be politically controversial.
"We also said in the rating affirmation that a deterioration in governance standards, for example, indicated by a significantly lower score for the World Bank Governance Indicators, could result in a negative rating action.
"UMNO's president Ahmad Zahid Hamidi faces several corruption charges but will reportedly not stand in the upcoming election.
"If we assess that accountability has weakened under the next government, this would weigh against any potential improvements in political stability," it said.