A tough balancing act for Malaysia
Strong GDP growth helps to stabilise Federal Government deficit and debt levels
PETALING JAYA: The prospect for Malaysia to balance its budget by 2020 is becoming more distant not just because of short-term challenges relating to a slowing economy, but also because the country lacks catalysts that will boost long-term growth.
Moody’s Investors Service senior analyst Christian de Guzman expects the Federal Government’s debt burden as a share of gross domestic product (GDP) to continue climbing and remain well above the median for A-rated peers.
Moody’s has an A3 stable rating for Malaysia’s sovereign credit. The rating agency last reviewed the country’s credit rating and outlook in July.
The Government has a 3% fiscal deficit target for 2017, from 3.1% this year. Measures including the abolishment or cuts in subsidies have brought the deficit down from 6.7% in 2009, when a raft of measures and spending was implemented to support the economy in the wake of the global financial crisis.
“While the Government’s budgetary discipline is credit positive, other aspects of the sovereign’s fiscal profile continue to deteriorate,” he said, adding that it could become challenging to meet this year’s deficit target.
de Guzman pointed out in a report that a decline in revenues, weakening debt affordability and an absence of major fiscal reforms place the medium-term goal of a near balanced budget by 2020 at risk.
He said despite the measures to improve tax collection and compliance, the ongoing deceleration in economic growth does not support the budget projection of a combined 8.4% increase in corporate and personal income taxes, while higher debt servicing costs have combined with falling revenue to weaken debt affordability.
Meanwhile, Fitch Ratings analyst Sagarika Chandra said in a report that the deficit level for this year would come in at 3.2%, while Federal Government debt would remain under 54% of GDP.
“Reasonably strong GDP growth has helped to stabilise Malaysia’s Federal Government deficit and debt levels,” he said.
Sagarika said the deficit target for next year “is achievable” and it remains unlikely that the target would be missed enough to push public debt above the self-imposed 55% ceiling.
He added that the 1Malaysia Development Bhd (1MDB) issue has had limited impact on policy making, political stability and fiscal finances, but remains a source of uncertainty.
“Fitch views 1MDB as a close – if informal – contingent liability of the sovereign, and will be monitoring it for any discernible negative effects on Malaysia’s fiscal position. Its unresolved issues also illustrate how governance standards remain a weakness in Malaysia’s credit profile,” Sagarika said.
Given the challenges of weaker exports and private consumption at home, a number of economists have suggested that raising productivity would boost the economy.
Socio-Economic Research Centre executive director Lee Heng Guie told StarBiz that the implementation of a digital economy policy would help to raise productivity.
He said based on his calculations, GDP growth under the 11th Malaysia Plan would come in at just under 5% from the official projection of 5% to 6%.
Lee said a growth rate of 5% to 5.5% would be possible with the digital economy driving productivity, employment and wages. Besides helping to boost the domestic economy, Lee said the digital economy would also be able to help export services. Currently, trade in goods dominate the supply-chain economy.
This can be done under the umbrella of the Asean Economic Community, the Regional Comprehensive Economic Partnership and the Trans-Pacific Partnership.
Lee added that policies related to the digital economy must be in tune with what the industry needed and help nurture entrepreneurs. Case in point will be the introduction of the Digital Free Zone, announced during the tabling of Budget 2017 last Friday that merges physical and virtual zones, with additional online and digital services to facilitate international e-commerce and invigorate Internet-based innovation.
“We’re waiting for the details on this initiative, what sort of platform this is going to be, what incentives there will be and who is going to drive it,” Lee said.