Firm measures to ride out challenges
BALANCING ACT: Fiscal discipline, consolidation will sustain Malaysia’s sovereign credit ratings, banks say
THE government has shown discipline towards balancing the nation’s finances despite a challenging year ahead, said the investing and financial services community.
In tabling the 2017 Budget, Prime Minister and Finance Minister Datuk Seri Najib Razak said Malaysia’s fiscal deficit would be cut to 3.0 per cent of gross domestic product (GDP) next year, from 3.1 per cent this year.
Permodalan Nasional Bhd (PNB) chairman Tan Sri Abdul Wahid Omar described the 2017 Budget as one of the most challenging budgets presented given the limited financial resources.
“Although the revenue of RM219.7 billion is 3.4 per cent higher than this year’s revised estimate of RM212.6 billion, the quantum is close to the revenue collected in 2014 and last year (RM220.6 billion and RM219.1 billion respectively).”
Wahid, who was Minister in the PM’s Department, was encouraged by the commitment towards fiscal consolidation.
“This is important to ensure we retain our international credit rating at ‘A3’ or ‘A-‘,” he added.
Both Fitch and Standard & Poor’s have accorded “A-” rating while Moody’s has given “A3” in its sovereign rating for Malaysia.
Banks were also happy to see the government focused on fiscal discipline and consolidation.
Datuk Abdul Farid Alias, group president and chief executive officer of Malayan Banking Bhd and chairman of the Association of Banks Malaysia, said this should alleviate any lingering concerns on fiscal policy credibility and the country’s finances.
“It will also sustain our investment-grade sovereign credit ratings and mitigate any pressure on key macroeconomic variables like market interest rates and the exchange rate,” he added.
To UOB Bank economist Julia Goh, the budget would be a tough balancing act between supporting growth, addressing policy gaps to tackle structural issues, and maintaining fiscal prudence.
“The government’s projections for next year appear a tad optimistic given subdued global growth outlook and multiple external risks that could tilt Malaysia’s growth towards the lower end of the government’s forecasts.”
Apart from the giveaways for the lower- and middle-income groups to hold up private consumption, the expansionary budget for development expenditure alongside infrastructure projects and lower company tax rates will support investment activity.
“We think there is some flexibility for fiscal adjustments (as seen in the recalibrated budget earlier this year) should actual growth and revenues fall short of expectations,” she said, adding this will ensure minimal fiscal slippage while keeping a floor under economic growth.
Alliance Bank chief economist Manokaran Mottain estimated that real GDP growth next year has to be at least 4.6 per cent in order for the deficit target to be met.
He said there could be downside risks to revenue collections, especially individual income tax, in light of rising unemployment and estimated lower income growth.
OCBC Bank economist Wellian Wiranto said at 3.0 per cent of GDP, next year would be another year of fiscal consolidation, given this year’s fiscal deficit projection of 3.1 per cent of GDP.
“In and of itself, that should be enough to pre-empt the rating agencies from having to go through the motion of looking closely at any potential changes to their sovereign ratings for Malaysia.”
Moody’s said yesterday the budget’s focus on near-term fiscal consolidation supports Malaysia’s “A3” rating.
However, Christian de Guzman, its senior credit officer, expects government’s debt to continue to climb.
“It remains unclear how the government's previously stated goal of a balanced budget by 2020 can be reached, especially given the absence of major reforms to increase revenue.”
At a projected 16.6 per cent of GDP next year, revenue will drop for a fifth consecutive year from a recent peak of 21.4 per cent of GDP in 2012, he pointed out, adding that it will also be the lowest revenue take since 2000.
Ahead of the release of 2017 Budget, Fitch Ratings’ Sagarika Chandra expected a higher deficit of 3.2 per cent of GDP, based on a less optimistic growth projection for this year.
While continued fiscal consolidation has stabilised the level of government debt and deficit ratios, contingent liabilities still posed a risk to broader public sector finances, she said.