Moody’s: No measures for revenue reform

Agency analyst says risks to the budget assumptions for GDP are skewed to the downside

PETALING JAYA: Budget 2018 has not provided firm policy measures for revenue reform – despite emphasising the need for fiscal deficit reduction, according to Moody’s Investors Service.

“While we expect the deficit target to be met given the supportive growth and commodity price environment, risks to the budget assumptions for gross domestic product (GDP) and revenues are skewed to the downside,” the rating agency’s analyst Anushka Shah said in a report.

“According to budget assumptions, revenues will continue to decline as a proportion of GDP, to 16.6% in 2018 from 16.8% in 2017, a continuation of the trend seen since 2012 (when revenues stood at 21.4% of GDP), and leaving the ratio among the lowest of A-rated sovereigns,” she said.

Anushka added that debt, as a proportion of revenue, would continue to exceed those ratios of similarly rated and even lower-rated sovereigns.

“The budgeted pace of revenue growth, if achieved, would be the fastest since 2012.

“This is driven by a 6.9% year-onyear (versus 6.6% in the previous year) rise in corporate tax collection, which accounts for a third of total revenues.

“Goods and services tax (GST) revenue – about a fifth of total revenue – is budgeted to increase 5.5% year-on-year in 2018 versus a relatively low 0.7% rise in 2017. However, there are no explicit

Our own 2018 GDP estimate is at the lower end of this band, based on consumption growth at 6.4%. Anushka Shah

measures to support an increase in collection and targets instead rely on relatively strong consumption growth.”

Generally, the budget relies on the underlying assumption of an expansion in GDP to the tune of 5% to 5.5% in 2018 from 5% to 5.7% in 2017, Anushka said.

“Our own 2018 GDP estimate is at the lower end of this band, based on consumption growth at 6.4%. As a result, we think that the risks revenue collection are skewed the downside.

“Total spending is budgeted to rise by 5.4% next year, but as a percentage of GDP, it will also fall for the seventh consecutive year, facilitating overall deficit reduction.”

Anushka said the Government’s targeted reduction in the fiscal deficit will lower the debt burden to 51.5% of GDP for 2018, down from an estimated 52.5% in 2017.

“However, at these levels, debt remains higher than the A-rated median of 40.9% for 2017, which informs our assessment of Malaysia’s moderate fiscal strength and constrains upward credit pressure.”

Moody’s said spending that would foster inclusive growth takes priority ahead of elections due to be held by August 2018 – and while development expenditure is budgeted to rise just 0.2% year-on-year, it said operating expenditure is projected to to to increase by 6.5%.

“Spending is focused on small and medium enterprises, supporting export growth, and boosting sectors such as agriculture and tourism.

“There is also some allocation towards improving transport infrastructure. Another thrust area is meeting goals under the so-called ‘2050 National Transformation’ programme, by providing support to minority segments of society.

“Salaries and emoluments continue to dominate the expenditure mix, accounting for over a third of total spending.”

As part of the budget, the Government plans to increase special assistance to civil servants, paddy farmers, and teachers, Anushka said.

“At the same time, subsidies, which account for over 11% of total spending, are projected to rise by 15% year-on-year versus 2017 estimates.”