MOODY’S Investors Service, the reputable international ratings agency, yesterday flashed red lights about the likely emerging weaknesses in our economy.
This warning has come on the heels of Budget 2018 which was announced by the Prime Minister last Friday. Moody’s Investors Service has given us a rating of A3 with a “Stable Outlook”. This is good except that it also highlights the following warnings.
1. Moody’s is not optimistic that the budget forecast of 5% to 5.5% growth will be achieved. It thinks that 5% growth is more likely. This means there will be some slowdown in economic activities, with the implications of lower incomes and higher unemployment.
2. Moody’s cautions that our budget revenues as a share of our gross domestic product (GDP) is among the lowest in its rating category of A3. It highlights the fact that Budget 2018 has no new tax proposals. We are thus depending on just natural growth of revenues, which are estimated to continue to decline to 16.6% in 2028 from 21.4% in 2012. This is not healthy. Should we tax the higher income groups more?
Even this lower proportion of tax to GDP may not be realised as commodity prices and global demand for our exports may not rise as much as expected. What if prices for commodities like oil and gas and palm oil decline to lower than our projections?
3. On the other hand, the budget expenditures have been significantly raised in the so-called election budget, especially in the operating expenditures, while still maintaining high development expenditures.
4. The budget could therefore come under considerable strain. The struggle to achieve the budget deficit target of 2.8% of the GDP could therefore be very challenging for Budget 2018. This would be a red light signal for not only the health of our budget but the economy as well.
5. The debt which is now estimated at 51.5% of GDP for 2018 could rise further to finance a worsening current account deficit. Already, Moody’s is warning that this debt rate is much higher than the A-Rated median of 40.9% for 2017.
Is this another red light warning to tell us to be more careful lest we get downgraded from Moody’s current rating of A3? Moody’s Report on our economy is analytical and frank. Hopefully, we will take heed of their views, taking into account our own concerns.
TAN SRI RAMON NAVARATNAM
Asli Center for Public Policy Studies