Winning over rating agencies just as crucial

EARLY next week, Finance Minister Lim Guan Eng will be paying a visit to the rating agencies to state Malaysia’s rationale for the decisions taken in Budget 2019.

Meeting the rating agencies is an important step in articulating the fiscal position the country is in. While winning over the electorate is for domestic politics, convincing the international rating agencies that measures in the Budget are not detrimental to the fiscal consolidation the country intends to take and the growth prospects it foresees in the years ahead is also significant.

The importance of that was shown in the delivery of the Budget. Lim had earlier spoken on how the currencies of countries with twin deficits, which is a deficit in the current and fiscal accounts, had been hit.

He also said the current administration was committed to maintain a path of fiscal consolidation to achieve a deficit of 3.4% in 2019; 3.0% in 2020 and 2.8% in 2021.

He said that over the medium term, the deficit was expected to be reduced further to the region of 2%.

In Malaysia’s case, management of the current account has been a priority, where a government committee sits to deliberate on actions needed to ensure the country always maintains a current account surplus. But the path of reductions of the fiscal deficit encountered a hiccup as cleaning up government finances of the past administration will see the deficit hit 3.7% this year and fall to 3.4% next year.

A couple of rating agencies have already let known their early assessment of what they thought of the Budget.

Moody’s noted the departure of the planned reduction of the fiscal deficit and acknowledged that new tax revenues and spending cuts will put Malaysia back on track in its deficit reduction plan.

It did, however, say that wider deficits and the reliance of oil-related revenues, especially after Petronas gives a one-off RM30bil special dividend, will weaken our credit profile.

S&P, which noted that the fiscal deficit projections were higher than expected, was a little kinder in its quick assessment of the Budget and said the commitment to fiscal

The message to the rating agencies will be that this is the temporary cost of a clean-up of the country’s finances.

reduction was credible and pressures of funding GST rebates should ease after 2019.

The opinion of rating agencies is important for Malaysia as the country enjoys a higher good rating given some of its fundamentals and a change in the country’s credit rating will affect the cost of funds and the capital markets.

That is why the decision to keep growth rates up when incurring a higher fiscal deficit is crucial for Malaysia as the country’s economic growth has been a strength when evaluated by the rating agencies.

The message to the rating agencies will be that this is the temporary cost of a clean-up of the country’s finances.

They will also know that costly subsidies, especially the expensive petrol subsidies, have been rolled back and will become targeted and that the Budget does not lavish money on the public but instead includes programmes that will aid and boost the country’s human capital.

Investment in education and skills training is essential in building the workforce of the country to take advantage of Industrial Revolution 4.0 and also to get the young to be more readily employable in the future.

The tax cuts for SMEs will be welcomed by small businesses and setting a minimum wage of RM1,100 for the whole country is a step in the right direction.

There are many small measures announced that will help individuals and the absence of announcing big ticket items and knowing that the tax framework in Malaysia will be looked at in the medium term would be another positive for not only future finances of the country but also the wellbeing of Malaysians from the coming budgets.