FISCAL risk management has emerged as an important aspect in budgetary processes and fiscal estimates.
Unexpected circumstances in recent years, particularly the Covid-19 pandemic and geopolitical tensions, have shown that a country’s public finances can be adversely affected without proper risk identification and management.
Apart from these unforeseen events, the government’s policies may pose risks to its fiscal estimates and forecasts.
Therefore, many countries have imputed governance and transparency into their legal framework to encompass fiscal decisions that may impact any long- and medium-term fiscal forecasts.
As an open and diversified economy, Malaysia is not completely insulated from global and domestic developments that have affected its fiscal outcomes over the last few decades. Therefore, fiscal risks in Malaysia mainly occur from either macroeconomic risks or specific risks.
Macroeconomic risk arises from any changes in conditions which could directly alter the economic parameters such as gross domestic product growth, commodity price and inflation, assumed in the budgetary planning and fiscal forecasting.
Specific risk is unique and affects a particular component of the fiscal structure that may contribute to uncertainties in fiscal outcome.
Changes in policy direction and demography, as well as events that cause contingent liabilities to materialise and natural disasters are some instances of specific risks.
The Covid-19 pandemic has impacted economic growth worldwide, consequently exposing or aggravating most governments’ fiscal vulnerability.
In Malaysia, continuous risk identification and assessment are being carried out to ensure proper policy responses in mitigating the impact.
Hence, the government has identified potential fiscal risks in the coming years that may affect public finances, such as inflation and higher subsidy expenditure, a slower growth outlook and moderated commodity price in 2023.
Malaysia’s fiscal risk management framework has been in place since the country’s independence and has gradually evolved.
There was exponential improvement in the country’s fiscal risk management in the last few decades, contributed by the lessons learnt from numerous episodes of crisis.
Currently, the fiscal risk framework is divided into three main components, namely legal framework, administrative control and monitoring committee.
Historically, Malaysia has a good track record when it comes to mitigating risks and responding swiftly to any economic shocks faced by the country.
Though measures taken during the crisis impacted the fiscal outcome during the year, the government will steadily pursue the fiscal consolidation path towards strengthening public finances.
However, the need for a more comprehensive fiscal risk management is increasingly important, in line with the changing dynamics of the world.
Unexpected occurrences of events such as geopolitical crises, spread of diseases and natural disasters can distort the global trade supply chain, hence affecting the fiscal outcome of a country.
Furthermore, the world has seen the economic crisis cycle shortened year by year, limiting the time for governments to consolidate their fiscal position in embracing the next cycle of crisis.
Therefore, effective management of fiscal risks will enable the government to plan for sufficient fiscal space and prepare for any shocks.
The introduction of the Fiscal Responsibility Act will support the government in enhancing fiscal risk management, while also improving Malaysia’s fiscal policy formulation in accordance with international standards and global best practices.
