Heed red light warnings

MOODY'S Investors Service, the reputed international Rating Agency, today flashed red lights about the likely emerging weaknesses in our economy.

It has given us a rating of A3, with a Stable Outlook. This is good except for the fact that it also highlights the following warning.

» Moody's is not optimistic that the budget forecast of 5 -5.5% growth will be achieved and instead thinks that only 5% growth is more likely. This lower rate of growth projected by Moody's, means that there will be some slow down in economic activities, with the implications of lower incomes and higher unemployment. Lets take heed of this red light.

» Moody's cautions that our budget revenues as a share of our gross domestic product (GDP) is among the lowest in its rating category of A3. It highlights the fact that the 2018 Budget had no new tax proposals. We are thus depending on just natural growth of revenues, which are estimated to continue to decline to 16.6% in 2028 from 21.4% in 2012, just five years ago. This is not healthy. Should we tax the higher-income groups more?
Even this lower proportion of tax to GDP may not be realised, as commodity prices and the world demand for our exports may not rise as much as expected . What if commodity prices decline to lower than our projections, like for oil and gas and palm oil.

» On the other hand, the budget expenditures have been significantly raised in the so-called election budget, especially in the operating expenditures, while still maintaining high development expenditures.

» The budget could therefore come under considerable under strain. The struggle to achieve the budget deficit target of 2.8% of the GDP could therefore be very challenging for Budget 2018. This would be a red light signal for not only the health of our budget but the economy as well.

» The debt which is now estimated at 51.5% of GDP for 2018 could rise further to finance a worsening budget current account deficit. Already, Moody`s warn that this debt rate is much higher that the A- rated median of 40.9 %for 2017.

Is this another red light warning, to tell us to be more careful, lest we get downgraded by Moody's, from the current rating of A3 to something lower?

The Moody`s Report on our economy is analytical and frank. It highlights some red light warnings, as to what our budget and economic weaknesses are and the challenges we face. It is good that we have independent and competent international rating agencies and the World Bank and IMF, that give us objective, though sometimes too subtle advice.

Hopefully we will take heed and be guided by their views, taking into account our own concerns, which only we can fully appreciate, and act accordingly. But red lights cannot be ignored, lest we run the risk of serious accidents.

Tan Sri Ramon Navaratnam
Asli Centre for Public Policy Studies