Higher fiscal deficit seen as threat to Malaysia's credit ratings

PETALING JAYA: While Budget 2019, the first under the Pakatan Harapan government, has delivered a clearer policy direction that reinforces foreign investors' confidence, the higher fiscal deficit is a threat to Malaysia's sovereign credit ratings, say analysts.
Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew told SunBiz that the rating agencies are always "very mindful" of the deficit position, when Malaysia is grappling with big financial constraints with expenses growing rapidly than revenue expansion.
"Over the past 10 years, expenses have grown 9.4% per annum, which is about three times the 3.4% revenue growth."
Sunway University Business School's Professor of Economics Dr Yeah Kim Leng said the the immediate concern is that high fiscal deficit may have negative implications on the market.
"The government is adopting a 'soft approach' in fiscal consolidation, some investors may react negatively to it."
Malaysia's fiscal deficit is estimated to rise to 3.7% this year, significantly higher than the initial estimate of 2.8% due to the previously unbudgeted items such as RM1 billion interest servicing cost for 1Malaysia Development (1MDB) debts and RM3.9 billion goods and services tax (GST) refunds, among others. However, a gradual reduction could be seen at 3.4%, 3% and 2.8% for 2019, 2020 and 2021, respectively.
Yeah said though high fiscal deficit is a negative, it is likely to be offset by sustained economic growth of close to 5% in 2019 as well as fiscal management to reduce the debt level.
Saying that deficit is just one metric in determining a country's credit profile, he noted that the enhancement of spending efficiency, reduction of consumption and leakages will add to the growth momentum.
UOB Bank senior economist Julia Goh sees high fiscal deficit targets as a temporary diversion and does not steer away from the path of fiscal consolidation.
"As for Malaysia's sovereign ratings risks, we view the risks to be quite balanced. Positive ratings factors including efforts to restore public finances, improve transparency and governance standards. However negative factors are the higher headline fiscal trajectory, execution risks and revenue uncertainties."
Pong believes foreign investors are convinced by the changes and reforms that the government has undertaken to address the weaknesses.
"I think the effort to reduce fiscal deficit will be well received by foreign investors, particularly when more investors are moving out from China to the Southeast Asian markets, including Malaysia due to trade war tensions."
Calling it "unusual circumstances", Pong said the RM30 billion special dividend from Petroliam Nasional Bhd (Petronas) should not jeopardise the oil major's expansion plans, especially exploration projects.
Yeah believes the special dividend from Petronas is premised on high oil price without posing any risk to it, but it shows that the government is still dependent on oil revenue. Having said that, the positive part is more innovative measures have been introduced to enhance the government coffers albeit raising a small amount of money.
Meanwhile, Moody's Investors Service's vice-president/senior analyst of sovereign risk group Anushka Shah said new tax revenues and spending cuts may place the country back on the path of fiscal consolidation over the medium term, and improved transparency and a focus on inclusive growth will be credit positive if sustained over time.
"However, in the near term, wider deficits and a heightened reliance on volatile oil-related revenues, including through Petronas dividends, will weaken the fiscal profile."