Spotlight on size of fiscal deficit
Economist concerned about how investors, rating agencies will react
KUALA LUMPUR: Ahead of Budget 2019, the focus is increasingly shifting to the size of the fiscal deficit and how rating agencies will react.
According to Maybank Investment Bank Bhd’s group chief economist Suhaimi Ilias, the immediate concern is how investors and rating agencies will react to the new budget deficit numbers.
Suhaimi forecasts a deficit of between 3.5% and 4% of gross domestic product (GDP) in both 2018 and 2019 due to the RM21bil loss of revenue from the goods and services tax (GST), as well as the RM35 bil GST outstanding refunds and income tax.
Sources confirmed that the Ministry of Finance (MoF) is likely to do a “one-off payment” for outstanding GST refunds and income taxes of around RM35 bil, resulting in a budget deficit of 3.4% of GDP next year.
“Officials are concerned over how rating agencies and market investors would react to a hike in the budget deficit,” the source said.
According to the mid-term review of the 11th Malaysia Plan which ends in 2020, the federal government budget deficit is expected to average 3%, which is higher that the original target of less than 2.8%.
“With the spike in budget deficit, my immediate concern is the reaction of market investors and credit rating agencies. That is the black box. It is a worrying situation for the country’s sovereign ratings,” Suhaimi said.
The country’s ratings could be downgraded, which will put pressure on the ringgit due to the sizeable foreign holdings in our bond market, he said.
Nonetheless, Suhaimi said the different ministries have floated “creatively formulat- ed policies” to create new revenue streams. This includes leasing under-utilised government assets to the private sector and opening scientific facilities for rent, which would spur R&D activities.
Others include targeted fuel subsidies, deriving revenue from the agro-food sector and rental from affordable housing.
Suhaimi believes the criteria for cash aid Bantuan Sara Hidup, formerly 1Malaysia People’s Aid or BR1M, is likely to be reviewed with a possible cleaning up of the list of seven million recipients.
“The cash aid was previously used as a political tool to buy support and not given to those who needed it,” he said.
Overall, Budget 2019 is expected to be a practical budget in view of the government’s fiscal situation with possible structural changes to attain fiscal consolidation efforts by 2020.
“People have to be realistic. We have to accept the situation we are in and hope that this would be a temporary one-off situation for the deficit. We will get back on track after a couple of years,” said Suhaimi.
Post-Budget 2019, Suhaimi said it is pertinent for the MoF to continuously engage with the rating agencies to convince that the rise in budget deficit was a “temporary bite-the-bullet situation”.
He is optimistic that the new government would be able to reduce the deficit to 3% of GDP should it undertake more asset monetisation in the coming years.
Meanwhile, Bloomberg reported yesterday that any sign of the government stepping further away from balancing the budget may lead to a sell-off in local bonds. Malaysian bonds have been Asia’s best performers this year even after the government spooked markets by announcing a larger-than-expected debt burden. Hence, their day of reckoning may be rapidly approaching.
The situation could also weigh on the government’s efforts to win back the confidence of global investors after a clampdown on speculators in late 2016, which effectively shut down the offshore non-deliverable forwards market.
The budget may also have implications for Malaysia’s sovereign credit rating. The recent upward revision in the government’s fiscal deficit target is credit negative, Moody’s Investors Service said last week. The agency rates the nation’s debt at A3, its seventh-highest investment-grade ranking.
Strategists are predicting the nation’s bond yields will rise next year. The benchmark 10-year yield will climb to 4.50% by the end of December 2019, according to the median forecast in a Bloomberg survey of financial analysts. The yield was at 4.18% on late Friday.