Budget 2016 sustains credit-positive fiscal consolidation, says Moody’s

"Development spending takes priority, with a particular focus on housing and transport infrastructure," Moody's says.

KUALA LUMPUR: Moody’s Investors Service says Malaysia’s 2016 budget - which targets a deficit equal to 3.1% of gross domestic product (GDP) - keeps the Government’s credit-positive fiscal consolidation trend intact while further reducing its reliance on oil revenue.
The credit rating agency, which assigns an A3 rating with a positve outlook to the country’s long-term debt, said in a statement that the recently announced budget could “modestly encourage” consumption by buffering lower-income households against higher living costs.

However, it said, the budget did little to deliver structural reform that could provide longer-lasting support to the Government’s finances and the economy.

Moody’s believes that overall the budget signalled the Government’s commitment to keep its fiscal deficit under control, despite the persistence of low commodity prices, slowing economic growth and strong political headwinds.

These conclusions were contained in a just-released report, “2016 Budget Sustains Credit-Positive Fiscal Consolidation; Reform, Economic Support Are Limited.”

Moody’s considered the macroeconomic assumptions in the budget realistic. 

“The budget outcome hinges on real economic growth of 4.0% to 5.0% in 2016, in line with our expectations of 4.5% GDP growth in that year. It also assumes that global crude oil prices will remain low at US$48 per barrel in 2016, below Moody’s assumptions of US$53,” it said.

Moody’s noted that the slowing in the pace of fiscal consolidation might affect the Government’s ability to achieve its target of a balanced budget by 2020, which would require a steeper reduction in the deficit in subsequent years.

“Still, increasing reliance on goods and services tax (GST) receipts over oil-related income to drive revenue growth enhances the sustainability of the Government’s fiscal tightening,” the agency said.

The budget provides some limited support to economic growth, according to Moody’s.

“Development spending takes priority, with a particular focus on housing and transport infrastructure. The budget also sets a minimum starting salary and a pension rate for civil service pensioners, and increases cash transfers to lower-income households and single individuals,” it said.

The agency said the measures outlined in the budget should modestly encourage private consumption, and public development spending could help to draw funding from the domestic private sector and raise foreign direct investment.

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