SOVEREIGN ratings agency Standard and Poor’s (S&P) is encouraged by the government’s announcement of the Goods and Services Tax (GST) and subsidy rationalisation programme.
S&P also expects Malaysia’s public debt to gross domestic product (GDP) ratio to drop to 2.9 per cent over the next three years.
In a revised outlook from 3.8 per cent previously, S&P remarked on Thursday that Malaysia’s fiscal performance has improved more than expected.
It said the government’s recent measures to reform subsidies and introduce GST at six per cent next year will help fiscal consolidation.
“The government’s plan to balance the budget by 2020 is encouraging. However, its success depends on the initiatives to materially reduce the size of the total subsidy, the rationalisation of general expenditures and improvement of revenue collection,” it said in its latest outlook on Malaysia.
S&P affirmed its “A-“ long-term and “A-2” short-term foreign currency sovereign credit rating, saying the stable outlook reflects its expectation for Malaysia over the next 24 months.
The fiscal debt burden has been increasing since the government borrowed more for its stimulus spending in 2009.
It expects net general government debt to peak at about 50 per cent of GDP this year, before declining gradually as fiscal consolidation efforts bear fruit.
S&P said the percentage of foreign holders of ringgit-denominated Malaysia Government Securities rose sharply to 45 per cent last year.
“Although foreign interest in local currency bonds offers a sovereign more funding diversification, high non-resident holdings leave the country’s capital market vulnerable to a sudden reversal in the flow of cross-border funds, which are often more volatile than domestic funds,” it warned.
It expects stronger trade surpluses in the next two to three years
Malaysia’s strong external position is a result of years of persistent current account surpluses, although the narrow net external debt as a share of current account receipts turned positive for the first time due to the decline in foreign reserves.
S&P said it may raise the sovereign credit ratings for Malaysia if stronger economic growth and the government’s effort to reduce spending, particularly in subsidies, reduce deficits further.
It may lower the ratings if the government fails to deliver reform measures to reduce its fiscal deficits, increase the country’s growth prospects and prevent the external position from deteriorating.
These reforms may include implementing the GST, reducing subsidies, boosting private investments, and diversifying the economy, it added.