Govt likely to narrowly miss deficit targets – Moody's

KUALA LUMPUR: The government is likely to narrowly miss its deficit targets for this year and next year, amid dampening effects of slower nominal revenue growth combined with the difficulty in limiting spending when demand is weak, said Moody's Investors Service yesterday.

The ratings agency said despite weaker external demand as well as volatile commodity and financial markets, the government has maintained a credit-supportive fiscal consolidation path on its 2020 budget as it targets a deficit of 3.2 per cent of gross domestic product (GDP) next year, wider than its original 3.0 per cent goal.

The 2020 deficit is however smaller than the projected deficit of 3.4 per cent of GDP in 2019, it said.

“Excluding one-off revenue and expenditure items from 2019, the 2020 Budget – the government's second since it came to power in May 2019 – is based on a 4.8 per cent year-on-year increase in revenue and a 6.5 per cent rise in expenditure.

“As a share of GDP, this would mean an extension of the fall in revenue that has been underway since 2012, highlighting the deterioration of the government's income base,” said Moody's.

The ratings agency said this in its note titled “Government of Malaysia: Growth-focused budget pursues continued deficit reduction; government may narrowly miss targets amid weak demand” released yesterday.

Moody's noted that for revenue, this included a RM30 billion special dividend from Petronas, while expenditure incorporates a one-off allocation for outstanding tax refunds of RM37 billion.

The revised revenue estimates for 2019 factored in a small rise in receipts from the Sales and Services Tax (SST) while the Special Voluntary Disclosure Programme will also contribute to larger individual and corporate tax collections.

Meanwhile, expenditure will be slightly greater than budgeted due to fuel subsidies, even as project rescheduling and cost revisions lower development spending, it said.

“Under current fiscal considerations, we expect government debt will edge close to 55 per cent of GDP in 2019 and 2020. At these levels, debt remains higher than the A-rated median forecast of 37.6 per cent for 2019, emphasising fiscal constraints as a key credit challenge for Malaysia, said Moody's.

Weaker revenue has also weighed on debt affordability. Based on government estimates, interest payments amounted to 12.5 per cent of revenue in 2019.