Malaysia GE14 results make policy shift more likely, says Fitch

Fitch: "An inquiry into scandals could improve governance indicators over time, mitigating a key rating constraint for Malaysia. "

NEW YORK/HONG KONG: The surprise victory of the opposition Pakatan Harapan (PH) coalition in Malaysia's general elections held on May 9 means a much higher likelihood of fiscal and economic policy change, says Fitch Ratings. 

The PH won 113 of 222 parliamentary seats, resulting in Malaysia's first electoral transfer of power since independence in 1957. 

Fitch affirmed Malaysia's 'A-' rating with a Stable Outlook on 28 March, noting that the election result was unlikely to lead to significant economic policy shift. 

The extent to which the new government's agenda will shift major policy is uncertain, but the PH victory and its policy platform indicate a much greater potential for change. 

In the meantime, Fitch will monitor the new government's policy agenda as it evolves.

The PH platform includes proposals to roll back tax and subsidy reforms as part of a 100-day fiscal plan. 

Notably, Fitch has highlighted policy slippage leading to deterioration in fiscal discipline and higher government debt or deficits as a negative rating sensitivity.

Among the most notable proposals is the replacement of the goods and services tax (GST) - a value-added tax launched in 2015 - with the narrower sales and services tax (SST) that had preceded it. 

The GST has become a key source of government revenue, accounting for 18% of total revenue equivalent to just over 3% of GDP in 2017. 

By comparison, the SST accounted for only 8% of total revenue and 1.6% of GDP in its last year, 2014. 

As such, absent offsetting measures, the replacement of the GST would result in a correspondingly higher deficit. 

Another significant element of the PH platform is a proposal to reinstate some of the fuel subsidies that were eliminated in 2015. Fuel subsidies accounted for around 1.7% of GDP in 2014 before they were rationalised, declining to 0.3%  in 2015. 

Therefore, if fuel subsidies are reinstated they could offset some potential budgetary gains from rising oil and commodity prices. 

Other notable PH platform policies include a review of government contingent liabilities and a Royal Commission of Inquiry to investigate recent corruption scandals. 

Reviewing contingent liabilities could limit the build-up of risks to broader public finances over the long term, though at the expense of creating some headwinds for domestic demand and growth. 

An inquiry into scandals could improve governance indicators over time, mitigating a key rating constraint for Malaysia. 

Malaysia's growth momentum remains strong and is a key factor underpinning its rating. We continue to forecast for average growth to exceed the 'A' median, though policy uncertainty and resulting market volatility may lead to some  short-term headwinds. 

Malaysia's credit has also benefited from improving external and fiscal accounts in recent years, while lower per capita income, social development and governance have acted as ratings constraints.