Despite the fiscal deficit, Malaysia's economy remains strong.
KUALA LUMPUR: RAM Rating projects the Malaysian Government debt to remain elevated at 51.4% of GDP in 2019 versus the estimated 51.6% in 2018.
The rating agency said on Thursday this ratio is significant as the country’s debt-servicing cost of 14.2% of total revenue (excluding the special dividend from Petroliam Nasional Bhd or Petronas) is elevated and trending upwards compared to Malaysia’s regional peers.
“Moreover, these ratios are not fully reflective of the sovereign’s indebtedness as various off-balance-sheet debts, which had been taken up to meet development objectives in the past, are being serviced by the government under different expenditure items,” it said.
Based on this definition, RAM estimates total effective debt to come up to 65.7% of GDP by end-2018.
RAM said the cancellation of mega development projects and the government’s intention of limiting the use of debt guarantees as well as improving administrative procedures for public-private-partnership projects will gradually ease this ratio.
The rating agency projects Malaysia’s fiscal deficit to narrow to 3.3% of GDP in 2019, from an estimated 3.6% in 2018.
This is amid still-resilient domestic demand growth, the implementation of various fiscal measures and ongoing institutional reforms.
It pointed out the significant one-off events next year, including a RM30bil special dividend from Petronas and RM37bil of tax refunds, are not envisaged to meaningfully affect Malaysia’s medium-term fiscal trajectory per se.
However, RAM said the government’s Medium-Term Fiscal Framework, which targets an average budgetary shortfall of 3.1% of GDP throughout 2019-2021, is considered achievable and highlights its commitment to fiscal consolidation.
Fiscal revenue, excluding the Petronas special dividend, is expected to only edge up 1.4% to RM236.9bil (or 15.5% of GDP) in 2019, a pale comparison to the 3.8% growth in 2017.
This highlights the role of oil and gas (O&G)-related revenue - which is expected to account for 30.8% of total revenue (inclusive of dividends) next year - as a significant stop-gap revenue source as new fiscal measures are implemented.
In the long run, Malaysia’s revenue is envisaged to be less reliant on O&G-related earnings amid the introduction of new revenue sources and ongoing institutional reforms.
These will be complemented, the medium term, by a likely increase in returns from its investments and by tapping other non-conventional sources of revenue.
Government expenditure, excluding the aforementioned tax refunds, is anticipated to increase 1.5% to RM277.6bil in 2019, i.e. below the 2012-2017 average growth of 4.0%. The deceleration in fiscal spending is largely due to the better targeting of bonuses for civil servants, the restructuring of subsidies and social assistance programmes, as well as better managed spending on supplies and services.
“While these are commendable efforts vis-à-vis curtailing government outlays, we expect some loss in efficiency that may reduce the anticipated overall fiscal savings during the early implementation phases of these measures.
"Nonetheless, fiscal expenditure is envisioned to slow down following the recent downscaling, postponement and/or cancellation of big-scale development projects,” it said.
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