Temporary rise in deficit, debt will not tarnish economic performance

24 Feb 2015 / 05:39 H.

    PETALING JAYA: A temporary increase in the budget deficit and government debt will not tarnish Malaysia's long-term economic performance as the government's efforts to alleviate these imbalances will likely yield positive results in the near future, said Malaysian Rating Corp Bhd (MARC).
    In its "Malaysia's 2014 Report Card and Risk Assessment" report, the rating agency said the government's dependence on external financing is minimal, and as the government has no history of default, the risk of sovereign stress in the medium term is limited.
    "Economic strength is also backed by the strong development of institutions that support its competitiveness, and this is reflected in the country's persistently favourable rankings in the World Economic Forum's (WEF) Global Competitiveness Index," it said.
    According to MARC, Bank Negara Malaysia's (BNM) past measures will continue to cap household debt growth from accelerating further and the existence of a decent amount of financial assets (although its distribution is not disclosed by the regulator) will partly cushion the impact of any significant correction in the financial market, such as an unexpected drop in property prices.
    Although BNM's measures may affect consumer spending growth in the near term, it will alleviate fundamental imbalances in the financial sector and MARC does not anticipate a hard landing in the household sector. However, it remains cautious of the slowdown in 2015.
    The interest rate normalisation in the US, which could increase the outflow of capital from Malaysia's financial markets, might not cause long-term damage to the economy while the depreciation of the ringgit over an extended period will likely support Malaysian exporters in the medium term, cushioning the impact of a weaker domestic economy.
    Overall, the strong economic performance of 2014 as reflected by the robust real gross domestic product (GDP) growth and a lower budget deficit, is credit positive for Malaysia and although it does not expect a repeat of a strong performance this year, MARC said the expected deterioration in 2015 will not affect Malaysia's long-term economic fundamentals, unless crude oil prices remain depressed for a considerable period.
    "Our outlook is based on the assumptions that the current distortion in global crude oil prices will be partially corrected and that prices in the medium term will be in the range of US$65 to US$75 per barrel. It also assumed that policies will continue to support Malaysia's real growth target in the medium term, and the current account position will not deteriorate excessively to the point of reaching a sustained deficit in the medium term," it said.
    MARC expects the inflation rate to be in the region of 3% to 3.5% in 2015, lower than its initial estimate of 4% to 4.5%.
    This is driven by expectation of weak crude oil prices in the first half of 2015, reduction in electricity tariffs and the anticipated slower consumer spending post-GST.
    It forecasted real GDP growth at 4.7%, on account of slower consumer spending growth which it expects to decelerate to 5.5%, due to stronger prices in the second half of 2015.
    "GDP growth might also be affected by lacklustre external demand, following lingering uncertainties in Euro-region economies as well as the continuing weakness of the Japanese economy. A moderation in China's growth will also add to the uncertainty of global trade performance in 2015.
    "That said, the current strong recovery of the US economy and a rebound in other advanced economies in the medium term will help Malaysia register an average real GDP growth of 5%, in our view."


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