Malaysia’s fiscal deficit target achievable in 2018

KUCHING: RAM Ratings believes that the projected narrowing of Malaysia’s fiscal deficit target to 2.8 per cent of GDP under Budget 2018, from an estimated 3.0 per cent in 2017, is achievable and underscores the Government’s commitment to long-term fiscal consolidation.

Furthermore, the adjustment to the government’s MediumTerm Fiscal Framework (MTFF) targeted fiscal deficit to an average 2.4 per cent of GDP throughout 2018-2020, from a near-balance target by 2020, is realistic and indicates a more gradual pace of fiscal consolidation.

RAM in a statement expects fiscal revenue to increase 6.5 per cent to RM240 billion in 2018 as negative pressures ease.

This will be largely driven by resilient economic growth – which should support GST collections – and a gradual recovery in global commodity prices, which will be positive for the Government’s oil and gas (O&G)-related revenue.

“Notably, O& G revenue is projected to exceed the government’s budgeted amount given its conservative assumed oil price of USD52 per barrel,” highlighted Esther Lai, RAM’s Head of Sovereign Ratings.

“These factors are, however, balanced by tax rate reductions for three brackets of personal income taxes – which are estimated to have a fiscal impact of RM1.6 billion (0.1 per cent of GDP) – and tax relief measures for companies.

Next year, RAM saw that operating expenditure is budgeted at RM235.7 billion, mostly due to higher amounts of social transfers in the lead-up to the 14th general election (GE).

“While the growth of emolument spending is likely to exceed the Government’s projected 0.4 per cent for 2018, arising from larger cash disbursements, the excess spending in this regard has been budgeted for in other line items.

“Additionally, we expect the continued roll-out of big infrastructure projects to elevate operating expenditure over the medium term, given such projects’ maintenance and debt service charges.”

While there is a higher likelihood of fiscal slippage leading up to the 14th GE, RAM said there was evidence that the government’s budgetary discipline has improved.

“Notably, fiscal slippage for emolument expenditure has been gradually declining since 2012 while spending on supplies and services was kept at 2.4 per cent of GDP in 2016 and 2017.

“Meanwhile, development expenditure is expected to remain flat at RM46 billion next year. This is lower than the RM52 billion average allocation implied under the 11th Malaysia Plan and also the average of 4.6 per cent for 2010 to 2015.

“The slower rise of development expenditure underlines the Government’s fiscal restraint, given its intention of containing its high debt levels and increasing use of off-balance-sheet sources of financing for large development projects.