Malaysia's 2018 fiscal deficit target of 2.8% of GDP achievable: RAM

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PETALING JAYA: RAM Ratings opines that Malaysia’s target to narrow its fiscal deficit to 2.8% of gross domestic product (GDP) under Budget 2018, from an estimated 3.0% in 2017, is achievable despite the federal government debt remaining elevated and its contingent liabilities significant at 16.9% of GDP in first half of 2017 (1H 2017).

It said federal government debt remains elevated despite the anticipated decline to 50.3% of GDP by end-2018, from the 2017 estimate of 51.2%.

The government’s hefty debt burden translates into a relatively high debt service-to-revenue ratio of 12.6% in 2018, higher than those of Malaysia’s peers in the region. This is exacerbated by higher bond yields following the adjustment of the Foreign Exchange Administration rules in November 2016.

“That said, these effects have since partially normalised,” said RAM.

The government’s contingent liabilities also remained significant at 16.9% of GDP in 1H 2017, which imposes a continuous risk on its fiscal position.
This ratio is estimated to rise to 18.4% by 2023, premised on RAM’s expectation of existing and upcoming infrastructure projects as well as the government’s routine commitments to housing and higher-education loan agencies.

“That said, stricter oversight over the issuers of these debts is likely following the establishment of the Fiscal Risk and Contingent Liability Technical Committee, and a possible introduction of a limit on guaranteed debt in the future,” said RAM.

It added that the adjustment to the government’s Medium-Term Fiscal Framework targeted fiscal deficit to an average 2.4% of GDP throughout 2018-2020, from a near-balance target by 2020, is realistic and indicates a more gradual pace of fiscal consolidation.

Fiscal revenue is expected to rise 6.5% to RM240.0 billion in 2018, as negative pressures ease. This will be driven by resilient economic growth and a gradual recovery in global commodity prices.

“Notably, O&G revenue is projected to exceed the government’s budgeted amount given its conservative assumed oil price of US$52 per barrel,” said RAM head of sovereign ratings Esther Lai.

These factors are, however, balanced by tax rate reductions for three brackets of personal income taxes, which are estimated to have a fiscal impact of RM1.6 billion (0.1% of GDP) – and tax relief measures for companies.

While there is a higher likelihood of fiscal slippage leading up to the 14th general election, RAM said, there is evidence that the government’s budgetary discipline has improved.

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