Higher budget deficit to impact ringgit in short term, Franklin Templeton says

KUALA LUMPUR: The government’s higher deficit target announced in the Budget 2019 will make the ringgit susceptible to short-term pressure, says Franklin Templeton GSC Asset Management Sdn Bhd.

Chief executive officer/head Malaysia fixed income & sukuk , Hanifah Hashim cautioned on Friday concerns on the rating outlook on Malaysia coupled with uncertainty in global economic backdrop might lead to continuous net capital outflow and discourage offshore investors from investing in Malaysia. 

“Additionally, with the higher reliance on Petronas dividends to finance Government revenue, we believe that the ringgit could experience higher volatility as capital market players once again associate the highly volatile crude oil prices to government oil-related revenue, similar to the 2010-2016 period,” she said.

In Budget 2019 announced by Finance Minister Lim Guan Eng last Friday, the government was emphasising on fiscal consolidation to achieve a deficit of 3.4% in 2019; 3.0% in 2020 and 2.8% in 2021.  Over medium term, the deficit is targeted to be reduced further to region of 2%, according to the Budget proposals.

Commenting on the deficit, she said the higher-than-expected target announced at 3.7% of GDP for 2018 was expected to create volatility for the markets in the short term. 

The fiscal consolidation plan may cause a re-evaluation of Malaysia’s sovereign credit rating, she said. 

Hanifah pointed out Moody’s in their June report stated the extent to which the new government achieves fiscal deficit consolidation will be vital in gauging the eventual effects on Malaysia's fiscal metrics and credit profile.

She said fiscal measures that satisfy international rating agencies credit metrics are crucial since the country's high debt burden acts as a credit constraint. 

Any change in rating will drive up the cost of borrowing for Malaysians tapping overseas markets and aggravate further capital outflow from financial markets.

Hanifah also expects the local bond market to be impacted for the remainder of the year owing to the higher-than-anticipated issuance of government bonds, in line with the higher fiscal deficit of 3.7%. 

“While we expect yield of Government bonds to rise in the short term, the plan for fiscal consolidation in 2019 could see lower Government bond issuance next year onwards. 

“This may offer some stability due to potential tightening of yields in the future, especially if the bond market starts to price in the potential reduction of the Overnight Policy Rate (OPR), by Bank Negara Malaysia to support growth,” she said.

 Hanifah pointed out the positive news for the bond market was the continuation of tax exemption for Sukuk issuance in the form of Ijarah and Wakalah structures. 

“This will boost the issuance in the Sukuk market even further and continue to position Malaysia as a leader in Islamic finance globally.

“However, the government’s decision to remove the tax exemptions on interest earned on wholesale money market funds may have a negative impact on the overall size of the wholesale market. 

“In the extreme case, assuming that all wholesale money market funds, valued at RM42.9bil are redeemed, it could be detrimental to the overall fund management size,” she said.


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