RAM Ratings views Malaysia’s Budget 2019 as a targeted approach to supporting growth while ensuring that its fiscal position remains manageable. Malaysia’s respective global- and ASEAN-scale gA2 and seaAAA sovereign ratings remain intact, as growth is expected to stay resilient at 4.9% in 2019 (RAM’s projection for 2018: 4.9%).
The ratings are also supported by the government’ commitment to narrowing the country’s fiscal deficit, backed by new revenue sources and cost-containment measures.
The government estimates that Malaysia’s fiscal deficit will widen to 3.7% of GDP in 2018 (2017: 3.0%), and has budgeted a narrower shortfall of 3.4% of GDP next year.
The wider-than-budgeted deficit in 2018 is reflective of an increase in development expenditure (arising from a reclassification of some operating expenditure items), the introduction and expansion of various welfare programmes for the people, and revenue constraints. The wider budgetary gap is considered temporary; ongoing institutional reforms, the introduction of various revenue measures and cost-optimisation initiatives are anticipated to improve the nation’s long-term fiscal prospects.
In 2019, operating expenditure is set to be 10.4% higher at RM259.9 billion (or 17.0% of GDP). While the increase is significant, the restructuring of retail fuel subsidies will limit the future growth of operating expenditure. Similarly, the rise in emolument expenditure next year is envisaged to be contained as civil servants’ bonuses will be more targeted under the current administration. Nevertheless, welfare transfers will remain a significant feature of the government’s overall operating expenditure.
The budgeted development expenditure of RM54.0 billion (or 3.5% of GDP) in 2019 is significantly higher than the 2010-2017 average of RM44.4 billion. The greater allocation underlines the de-emphasising of off-balance-sheet financing for big-ticket infrastructure projects. This move improves transparency and will stem the build-up of the government’s contingent liabilities. This is a step in the right direction towards
alleviating the overall debt service burden in the long run, as the government’s cost of financing is cheaper than government-guaranteed debts.
Meanwhile, next year’s fiscal revenue is projected at RM261.8 billion (or 17.1% of GDP). The sizeable amount is largely attributable to a special dividend from Petronas to facilitate GST and income tax refunds. The increase in revenue associated with fees and licences, the imposition of an excise tax on sugary drinks, ongoing tax reforms and the government’s intention of elevating dividend receipts from its investee companies are seen as positive efforts in diversifying its revenue base over the longer
term. The announcements on such revenue measures are commendable and highlight the government’s commitment to maintaining its fiscal position despite potentially adverse political implications.
Government debt, budgeted at 51.6% of GDP as at end-2018, is projected to taper off to 51.5% of GDP in 2019. Despite this, Malaysia’s debt burden remains hefty relative to its regional neighbours, although the country remains supported by sizeable domestic savings and a well-developed bond market. Other government liabilities – including debts owed by strategic institutions or entities – are also substantial,
estimated at RM199.9 billion as at end-October 2018. The administration’s intended reduction of off-balance-sheet financing for development expenditure is envisioned to decelerate its previously rapid growth.
The major risks to Malaysia’s fiscal position include the volatility of global energy prices, the possible fulfilment of fiscally onerous political commitments, and potential delays in the implementation of proposed revenue-enhancing measures.
Source: The Sun Daily