PETALING JAYA: Malaysia will need to make further progress on subsidy rationalisation and other fiscal reforms to meet the Government’s fiscal targets.
Moody’s Investors Service analysts said in a report that the recent fuel subsidy reduction was relatively “minor” and that further progress on subsidy rationalisation would be necessary.
The Government had on Monday announced that the RON95 petrol and diesel prices would be increased by 20 sen per litre, which would save RM1.1bil from September to December this year and RM3.3bil annually.
It also announced that the rationalisation exercise would be carried out in stages.
“Significant adjustments to the fiscal framework that broaden the tax base and reduce the subsidy burden have been largely absent since 2008. As such, the fuel price hike represents a credit positive step in the Government’s larger fiscal consolidation plan, details of which are to be unveiled in October’s budget speech,” analysts said.
They said savings from this round of fuel subsidies were “dwarfed” by the RM37.6bil allocated for the total subsidy bill, which accounts for 18.6% of current (or operating) expenditures in this year’s budget. Subsidies were 21.4% of 2012’s operating expenditures, up from 8.5% in 2007 and only 3.6% in 2003.
Prime Minister Datuk Seri Najib Tun Razak also announced larger cash handouts to low-income households to mitigate the effect of the higher fuel prices on their purchasing power. “Therefore, significantly lower fiscal deficits would require additional adjustments to the subsidy framework,” the analysts noted.
They added that the need to consolidate subsidies and broaden the tax base had been articulated by the Prime Minister in last year’s budget speech. Despite a weaker electoral mandate after May’s election, the ruling Barisan Nasional has, thus, demonstrated its resolve to implement its fiscal reform agenda.
“Nevertheless, the window to make difficult fiscal reforms is already closing. As the prospect of a tapering US Federal Reserve quantitative easing programme has already led to a selloff in emerging markets, the Government has acknowledged the immediate need to allay investors’ concerns about fiscal sustainability,” they pointed out.
The analysts also said that non-resident holding of Malaysian securities had declined since May, following 16 uninterrupted quarters of increasing external demand for these local-currency instruments. A disorderly selloff on a larger scale could adversely affect funding conditions for the Government.
The Government is committed to maintaining a full-year surplus in the operating budget, while keeping this year’s overall fiscal deficit under 4% of gross domestic product (GDP). However, fiscal transfers contributed to expenditure growth in the run-up to the general election in May, while revenues were constrained by the relatively weak performance of the commodities sector.
They said consequently, the Federal Government registered the largest overall fiscal and current deficits through the first half of any year on record. “We currently forecast the deficit at more than 4% of GDP and the lack of additional reforms would place the Government’s fiscal targets increasingly out of reach.”
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