IMPACT OF FISCAL DEFICIT CONTROL
Other credit metrics will look larger if growth cannot keep up with expanding economy, says MARC
MALAYSIA’S controlled fiscal deficit could lead to sluggish postcrisis economic performance and result in higher revenue loss.
Malaysian Rating Corp Bhd (MARC) senior economist and research head Firdaos Rosli said the idea of controlling the fiscal deficit is primarily for the expenditure and not revenue.
“All other credit metrics will look significantly larger if growth cannot keep up with an expanding economy,” he told the New Straits Times.
Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz had said Malaysia’s fiscal deficit would likely reach 6.2 per cent of gross domestic product (GDP) from the targeted 6.0 per cent this year if the government did not use RM5 billion from the National Trust Fund to expedite vaccine procurement.
Firdaos said development expenditure will take a larger hit compared with operating expenditure (opex) if the government practises fiscal deficit control.
“In line with population growth, opex can only grow larger and not lower. Therefore, controlling the fiscal deficit will impact future growth and our debt will look significantly bigger than what it is.”
Instead, Firdaos said the government should focus on the economic multiplier impact of infrastructure spending, which has the largest multiplier than any other type of spending.
“Do we have what it takes to create another round of transitional growth, or at the very least, maintain the past growth rates amid the pandemic?”
He said credit rating is an important indicator in determining the cost of borrowing, debt servicing capacity and the overall risk (including political risk) in investing in a particular country.
“We believe that the debt-toGDP is a self-imposed discipline. A high or low ratio tells us little about the actual creditworthiness of a sovereign.
“We believe debt-to-GDP is not a problem provided that the
economy grows in tandem or at a much faster pace, and debt servicing capacity remains intact.”
However, the main point of contention is how the debt can be represented and translated into growth.
He said Malaysia’s responses during crises, most notably after the mid-1980s commodity crisis, had resulted in slower growth.
Sunway University Business School economics Professor Dr Yeah Kim Leng said Malaysia’s credit rating is an important indicator as a sovereign rating downgrade would signify a deterioration of the country’s creditworthiness or credit quality.
“A downgrade will translate into not only higher borrowing cost but also a potential loss of investor
confidence, leading to disruptions to the financial markets, capital withdrawals and reduced foreign capital inflows.”
He said excessive debt could lead to a financial crisis.
“Excessive debt portends increased vulnerabilities of the economy to future economic, financial, pandemic or climate shocks,” he added.