Fiscal policies vital to credit quality: Moody’s

> 1MDB debt to ‘play important role’ in determining Malaysia’s contingent liabilities risk

PETALING JAYA: Moody’s Investors Service said while its assessment of Malaysia’s contingent liability risks posed by nonfinancial sector public institutions has also not changed, it stressed that the sovereign credit profile will depend on the impact arising from the new government’s fiscal policies.

“The new administration’s treatment of large infrastructure projects that may be placed under review but have benefited from government-guaranteed loans in the past, and outstanding debt from state fund, 1Malaysia Development Bhd (1MDB), will play an important role in determining risks that contingent liabilities pose to the credit profile,” the rating agency said in a report yesterday.

Moody’s is also maintaining its estimate that Malaysia’s direct government debt was at 50.8% of the gross domestic product (GDP) last Friday.

On the question on which of the new government’s policies will affect the sovereign’s credit quality, Moody’s said it will examine the policies holistically to gauge their impact on the credit profile, as in Malaysia’s case, fiscal measures are a particular area of focus, given that the country’s high debt burden acts as a credit constraint.

“Consequently, to what extent the new government achieves fiscal deficit consolidation will be vital in gauging the eventual effects on Malaysia’s fiscal metrics and credit profile.”

Noting that the change in the government will not materially alter growth trends in the near term, Moody’s said the scrapping of the Goods and Services Tax, in the absence of effective compensatory fiscal measures, is credit negative because this increases the government’s reliance on oil-related revenue and narrows the tax base, although this will boost private consumption in the short term.

It projected that revenue lost from the scrapped tax would measure around 1.1% of GDP this year albeit some offsets and it is expected to expand to 1.7% beyond 2018, further straining Malaysia’s fiscal strength.

“Moody’s views the targeted reintroduction of fuel subsidies as credit negative because subsidies distort marketbased pricing mechanisms, and could strain both the fiscal position and the balance of payments while raising the exposure of government revenue to oil price movements.”