Fitch sees downside risks to govt revenue target

It warns of headwinds from cooling external demand in 2018

KUALA LUMPUR: Fitch Ratings sees downside risk to the Malaysian government’s optimistic revenue projections as contained in the Budget 2018 proposals unveiled last Friday.

It said the Government’s 2018 GDP growth forecast of 5%-5.5% assumes that strong recent momentum will be maintained, but there could be some headwinds from cooling external demand.

“The Government’s upbeat growth forecast and optimistic revenue collection targets are key to its expectation that direct tax collection will increase by around 7% and GST revenue will rise by 5.5%.

“Shortfalls in revenue collection would most likely be offset by corresponding expenditure cuts to meet the deficit target,” it said.

Fitch said Malaysia’s government revenue remains sensitive to oil price movements, despite a dramatic drop in the federal budget’s share of oil and gas revenue in the previous few years.

It noted the government forecasts dividends from Petroliam Nasional Bhd to total RM16bil (US$4bil) in 2017 - up from an initial- ly budgeted RM13bil - and to rise to RM19bil in 2018.

This was based on the assumption that crude oil price will rise to US$52 a barrel in 2018, up from US$50 in 2017, which is broadly in line with Fitch’s own expectation.

Fitch also pointed out the Budget strikes a balance between providing measures that will be popular with the electorate ahead of the general election that must be called by August 2018 and sticking to a path of fiscal consolidation, Fitch Ratings says.

The ratings agency said on Tuesday the deficit target at 2.8% of GDP, a slight reduction from the government’s projected outcome of 3% in 2017 was in line with its expectations.

Operating expenditure is set to rise by 6.5%, including a large support package for the rural sector and pay-outs to public-sector workers and pensioners.

The income tax rate will also be cut by two percentage points for middle-income workers.

The Government expects these measures to be more than offset by a revenue boost from an improvement in economic condi- tions and oil prices and tax administration efforts, as well as a stabilisation of development spending following a strong increase to fund infrastructure projects in 2017.

“That said, off-budget infrastructure spending may continue to rise, with a corresponding increase in contingent liabilities.

Fitch said it did not believe that the fiscal deficit target will be missed by enough to knock the government off its deficit reduction path next year.

“The medium-term target of achieving a near-balanced budget by 2020 would require a step-up in consolidation efforts in 2019 and 2020, but is not unattainable.

“We expect the fiscal deficit to continue narrowing over the next few years and project federal government debt - which was 50.9% of GDP in June 2017 - to remain on a downward path and therefore stay below the authorities’ 55% self-imposed debt ceiling, but slightly above the 49% A median,” it said.

Fitch affirmed Malaysia’s sovereign rating at A- with a Stable Outlook in August 2017 while emphasising the importance of continued fiscal consolidation given the government’s high debt ratios.