KUALA LUMPUR: Malaysia's ambitious targets under the 12th Malaysian Plan is not helping build confidence with global investors, which play a crucial role in attracting portfolio flows and influencing financial market outcomes, including the strength of the ringgit, according to MARC Ratings Corp Bhd.
Effectively managing expectations of closely watched economic variables is essential for determining the valuation of Malaysian assets, said MARC.
Deviations from announced targets can lead to market disappointment and outflows, with foreign outflows particularly affecting ringgit strength, a key component of its valuation
"To effect a change in the trajectory of financial instruments' prices in the public markets, macroeconomic achievements must positively surprise the markets or exceed expectations, a core principle applicable across currencies, equities, and bonds, among other financial assets," the credit rating agency said in a statement today.
Therefore, realistic and achievable macroeconomic targets that address key concerns within financial markets are crucial, it added .
However, MARC said that the 12MP's ambitious gross domestic product (GDP) growth target of 5.0 per cent - 6.0 per cent per year and deficit-to-GDP ratio target of 3.0 per cent - 3.5 per cent by 2025 conflict with this aim, as they are far more optimistic when compared with historical levels.
MARC pointed out that Malaysia's 20-year (2003-2022) average annual GDP growth merely stood at 4.7 per cent, while the nation's average fiscal deficit-to-GDP ratio for the same period was 4.3 per cent.
The credit rating agency noted that 2023's advanced GDP growth estimate of 3.8 per cent falls short of the 12MP targeted annual range, while the 2024 government estimate of 4.0 per cent-5.0 per cent also points towards another miss.
The case is the same for Malaysia's fiscal consolidation efforts, according to MARC, as it observed that 11MP's 0.6 per cent fiscal deficit-to-GDP target by 2020 was far off the actual figure of 6.2 per cent.
Thus, these ambitious targets that lie beyond historical norms necessitate structural reforms beyond historical norms, MARC cautioned.
Anchoring domestic targets is crucial given the ongoing volatility in the global capital markets — exemplified by the recent retreat in expectations over the pace and extent of developed economies' future interest rate cuts due to elevated inflation that resulted in the ringgit's deprecation, from below 4.60 against the US dollar at the beginning of 2024 to the present level exceeding 4.70.
"Historical inflation in the US has remained persistent, supported by healthy labour markets," said MARC.
Furthermore, the Middle East geopolitical tensions alongside the ongoing Russia-Ukraine conflict may maintain elevated energy and agricultural commodity prices.
"Volatilities in the global external sector underscore the importance of a calibrated approach to Malaysia's domestic national plans, with a focus on pragmatic targets and fiscal rectitude, pivotal for influencing positive market dynamics and fortifying the nation's economic resilience," it added.