Budget signals stability, but weakness persists
International agencies Fitch, Moody’s keep close watch on falling revenues, weakening debt affordability
KUCHING: The recently announced Budget 2017 signified stability for Malaysia’s public finances but international rating agencies are keeping their eyes on weakening in debt affordability, and an absence of major fiscal reforms, which place the mediumterm goal of a balanced budget by 2020 at risk.
On the positive side, international ratings agency Fitch said Malaysia’s 2017 federal budget points to further stability in public finances, despite another decline in revenue from the oil and gas sector.
“Malaysia is better placed than many net commodity exporters to cope with the lingering effects of the negative shift in its terms of trade,” said Fitch in a statement yesterday.
“The dramatic fall in commodity prices since mid2014 has been the single most important factor behind the wave of 31 emerging-market sovereign rating downgrades made by Fitch in 2015-2016.
“Two - t h i rds of these downgraded sovereigns were heavily dependent on revenue from commodity exports. Malaysia is the largest net exporter of petroleum and natural gas products in Southeast Asia, and its finances have not been immune to the effects of the collapse in prices.”
The government estimates that oil and gas revenue will account for just 14.6 per cent of total revenue in 2016, down from 30 per cent just two years earlier,
Malaysia is better placed than many net commodity exporters to cope with the lingering effects of the negative shift in its terms of trade. Fitch
Fitch said.
Dividends from the state-owned oil company, Petronas, are forecast to fall to RM13 billion in 2017 from RM16 billion in 2016 and RM29 billion in 2014.
“However, the fall in commodity revenue has not triggered a rating downgrade,” it added.
“The sovereign has kept its ‘A-’ rating, which has been on Stable Outlook since mid- 2015. GDP growth has remained a credit strength despite the negative terms-of-trade shock.”
Moody’s Investors Services however believe the government’s credit-positive developments are offset by other developments including a decline in revenues, weakening in debt affordability, and an absence of major fiscal reforms, which place the mediumterm goal of a balanced budget by 2020 at risk.
“Over the first six months of 2016, a delay in dividend payments from Petroliam Nasional Bhd ( Petronas) contributed to the large revenue shortfall, with the national oil company remitting only around 37.5 per cent of a planned RM16 billion to the government.
“Other oil-related items, such as the Petroleum Income Tax and Petroleum Royalties, exerted significant downward pressure, due to weak global oil prices. Nonoil items, such as receipts from corporate and personal income taxes, also fell in year-on-year terms,” it highlighted.
“As a result, it may be challenging for the government to meet its 3.1 per cent of GDP fiscal deficit target for this year.
"In the first half, the federal government recorded a deficit of RM32.8 billion.
To reach the full-year target of RM38.7 billion, that implies a second-half shortfall of only RM5.9 billion, which would mark the narrowest half-year deficit since early 2011.”
For 2017, Moody’s said revenue remains the binding constraint to providing further support to the economy.
“The government projects dividends from Petronas to drop to RM13 billion,” it added, noting that it will contribute to a decline in revenue to 16.6 per cent of GDP, from a recent peak of 21.4 per cent in 2012.
“While the prime minister alluded to measures to improve tax collection and compliance, the ongoing deceleration in economic growth does not support the budget projection of a combined 8.4 per cent increase in corporate and personal income taxes.
“Given the lackluster outlook for revenue, the administration’s commitment to fiscal consolidation has led to a curtailment of spending – it projects expenditure as a share of GDP to fall to 19.6 per cent in 2017 from 25.7 per cent in 2012.
“Nevertheless, the prime minister used the overarching theme of “inclusive spending” to p r i o r i t i s e n e a r- t e rm accommodation for key constituencies, such as civil servants and the bottom 40 per cent of households according to income.”
Looking ahead, Fitch expects the economy to grow by around four per cent in 2016 and 2017, which is at the bottom of the government’s four to five per cent target range for 2017 but above the median of Malaysia’s rating peers.
it believed Malaysia’s household spendingcontinuestobesupported by a hike in public-sector salaries that took effect July 1, 2016, and will receive another boost from a 26 per cent increase in transfers to lower- income households included in Budget 2017.
“Reasonably strong GDP growth has helped to stabilise Malaysia’s federal government deficit and debt levels,” it explained. “The introduction of the Goods and Services Tax (GST) in April 2015 had also provided support to nonoil revenue.
“The government expects the GST to generate RM40 billion in 2017, up by 3.9 per cent on the 2016 estimate, and forecasts a 3.4 per cent increase in total federal government revenue in 2017. The federal government deficit target for 2017 is set at three per cent of GDP, which would be a slight fall from the government’s estimate of 3.1 per cent in 2016.
“Fitch expects the 2016 deficit to come in at 3.2 per cent of GDP, but views the 2017 target as achievable. We believe it is unlikely that the target will be missed by enough to push public debt above the self-imposed ceiling of 55 per cent of GDP.”