Fitch cautions about Malaysia's high public debt

KUALA LUMPUR: Fitch Ratings cautions about negative rating implications if Malaysia's already high public debt increases over the medium term.

The rating agency said on Thursday the Budget 2019 revises up the estimated central government deficit for 2018 to 3.7% of GDP, from a previous target of 2.8%. 

“We had expected the 2018 target to be met when we affirmed the sovereign rating at 'A-' with a Stable Outlook in August,” it said.

To recap, Fitch said it raised its estimate of end-2017 central government debt to 65.5% of GDP, from 50.8%, at the last review.

That was to reflect the government's recognition that it will need to service a large share of explicitly guaranteed debt. The median public debt ratio for 'A' rated sovereigns is 50.6%.

Fitch said the Budget 2019 confirmed an overrun of the 2018 deficit target. 

The Budget 2019 also set less ambitious targets for medium-term consolidation, “and increases dependence on oil-related revenue, which raises risks to the fiscal outlook”, says Fitch Ratings. 

On a more positive note, Fitch pointed out the budget also contained measures to improve transparency and public debt management, underscored by the inclusion of previously off-budget spending in the revised 2018 deficit target.
 
It pointed out the budget sticks to a path of fiscal consolidation over the medium term through measures to raise revenue, cut subsidies, and reduce expenditure. 

“However, headline consolidation goals are now more modest, as the deficit target for 2020 is now 3.0% of GDP, which is about one percentage point wider than previously targeted. 

“Our expectation is still that debt ratios will fall in the next few years, provided that GDP growth remains broadly in line with the authorities' revised outlook for growth of 4.9% for 2019 and 5% in 2020,” it said. 

However,  Fitch said the larger deficit targets suggest the pace of decline in the debt ratios could be slower and we believe risks to the fiscal outlook have risen. 

In particular, the government's revenue forecasts build in a sharp rise in the 2019 revenue/GDP ratio to reflect a special dividend from Petronas. 

Substantial measures to raise non-oil revenue will be required for the government to meet its medium-term targets if oil prices do not remain elevated. 

“Our own assumption is that oil prices will fall from US$70 barrel in 2018 to US$65 barrel, which is below the authorities' projections. 

“Additional revenue measures have been announced that could yield gains - such as higher property taxes and an increase in stamp duty - but there could be implementation challenges. 

“Expenditure overruns are also a risk, given the government's emphasis on populist measures to sustain growth and ensure socio-economic well-being,” it said.

The budget includes plans for sales of non-strategic public assets, which could help to bring down its debt ratio. 

Fitch said however, there are also risks to debt containment from contingent liabilities related to public-private partnerships estimated at more than 10% of GDP, which may migrate to the sovereign balance sheet as the government continues to increase the transparency of public finances. 

“Improvements in governance could eventually support structural indicators in Malaysia's sovereign credit profile, which are currently below the 'A' category median, but the benefits will take time to materialise,” it said.