Malaysia’s fiscal move too small to correct negative outlook, says Fitch
Malaysia's move to cut fiscal subsidies and limit import-intensive investments reflects its economic reforms but is seen as too small to overturn a negative outlook, Fitch Ratings said today.
The global ratings agency said fiscal consolidation would be harder as the local economy is undermined by falling prices of key commodities and a weaker government after the May 5 polls would make policies harder to implement.
"The upshot is that the corrective fiscal measures, announced yesterday, are too small to alter the Negative Outlook on Malaysia's "A-" sovereign rating.
"Sustained reform implementation, if accompanied by structural measures to broaden the revenue base, could make a difference to the sovereign's credit profile. But such an intensification of reforms that can also withstand potential growth headwinds, is not on the cards at present," Fitch Ratings said in a statement today.
It said the measures announced yesterday was a strong statement of the Najib administration's intention to "stem pressure on the sovereign credit profile from deteriorating public finances.
"The measures are consistent with Fitch Ratings' fiscal projections, and are credit-neutral over the near term. Further steps to improve fiscal sustainability and long-term macroeconomic stability could see the ratings revert to Stable Outlook," it said, adding the fuel subsidy cut was the first and small step to other measures to shore up public finances.
Fitch noted that projected near-term fiscal savings from the 20 sen/litre hike in the price of subsidised fuel products are RM1 billion ringgit in 2013 or 0.1% of the Gross Domestic Product (GDP) and RM3 billion (0.3% of GDP) in 2014.
The agency noted it had already factored in a net one percentage point of GDP reduction in government expenditure in its fiscal projections for the period to 2015, saying "so these measures in themselves do not significantly alter the agency's analysis".
It said the timing of the announcement seemed responsive to heightened global market volatility brought on by impending US Federal tapering and greater investor scrutiny of vulnerabilities in emerging markets.
"A more calibrated pace of public investment prioritising non-import-intensive projects should limit the risk of near-term fiscal overruns as well as lower the likelihood of the current account slipping into a deficit.
"We estimate that Malaysia's current account surplus will fall - sharply - to 3% of GDP this year after averaging 11% over 2009-2012," the agency said.
But Fitch said the fundamental driver of the narrowing current account surplus had been the widening public sector deficit, drawing attention to the health of medium-term public finances.
It said effective fiscal consolidation in the next 12 months would by no means be easy due to two reasons.
"First, the Malaysian economy is undergoing a terms-of-trade shock, with the prices of key commodity exports falling sharply. In this environment, expenditure restraint could raise downside risks to our GDP growth forecasts of around 5%, year-on-year, in 2013-2014.
"If this were to materialise, slowing growth could also lower tax receipts, making it that much more difficult to achieve the medium-term government deficit target of 3% of GDP by 2015," it said.
Fitch said the second reason was that the political position of the ruling coalition has weakened following the May election.
"This means the government is likely to continue to encounter difficulties in implementing far-reaching, and much delayed, revenue-enhancing reforms such as the Goods & Services Tax (GST)," it said.
The government has hinted it will table laws for the GST in the coming Budget 2014 session, as part of its plans to reduce the deficit to 3% of the GDP by 2015. - September 3, 2013.