Increasing budget deficit considered a threat to Malaysia's credit ratings

PETALING JAYA: While the 2019 budget, the first of the Pakistani Harapan government, has provided a clearer guidance boosting the confidence of foreign investors, the higher budget deficit threatens Malaysian sovereign debt ratings, analysts said.

Pong Teng Siew, head of research at Inter-Pacific Securities Sdn Bhd, said Sunbiz that rating agencies are still "very attentive" to the deficit position, while Malaysia is facing severe financial constraints and that its spending is increasing rapidly in relation to the increase in revenues.

"Over the past 10 years, spending has increased 9.4% per year, which is about three times the revenue growth of 3.4%."

Economics professor Yeah Kim Leng, professor of economics at Sunway University Business School, said the immediate concern was that a high budget deficit could have negative consequences on the market .

"The government is adopting a" flexible approach "to fiscal consolidation, with some investors being able to react negatively."

According to estimates, Malaysia's budget deficit is expected to reach 3.7 percent this year, well above the initial estimate of 2.8 percent, due to previously un-budgeted items. such as an interest management service of one billion RM for debts of 1MDB and three billion goods and services. tax refunds (GST), among others. However, a gradual reduction could be observed at 3.4%, 3% and 2.8% for 2019, 2020 and 2021, respectively.

Yeah, even if the high budget deficit is negative, it should be offset by sustained economic growth close to 5% in 2019 as well as fiscal management to reduce the level of debt.

Declaring that the deficit is only a decisive factor in determining a country's credit profile, he stressed that improving the efficiency of spending, reducing consumption and leakage would contribute to a dynamic economy. the growth.

Julia Goh, senior economist at UOB Bank, sees the high deficit targets as a temporary diversion and does not move away from the path of fiscal consolidation.

"With regard to Malaysia's sovereign rating risks, we believe that the risks are fairly balanced – positive rating factors, including efforts to restore public finances, improve transparency and governance standards." higher overall fiscal trajectory, the risks of execution and the uncertainties about incomes are negative factors. "

Pong believes that foreign investors are convinced by the changes and reforms undertaken by the government to address these weaknesses.

"I believe that efforts to reduce the budget deficit will be well received by foreign investors, especially as more and more investors leave China for markets in Southeast Asia. East, including Malaysia, because of tensions related to the trade war.

Calling it "unusual circumstances," Pong said the special dividend of 30 billion RMB from Petroliam Nasional Bhd (Petronas) should not jeopardize the oil company's plans for expansion, particularly the projects planned by the oil company. # 39; exploration.

Yeah thinks that Petronas' special dividend is based on the high price of oil without risk, but it shows that the government remains dependent on oil revenues. That said, the good news is that more innovative measures have been introduced to improve the government coffers, even if they yield little money.

For its part, Anushka Shah, vice president and senior analyst of the sovereign risk management group at Moody's Investors Service, said the new cuts in tax revenues and spending could put the country back on the road to medium-term fiscal consolidation, as well as increased transparency and a focus on inclusive growth. have a positive credit if it stays in time.

"However, in the short term, larger deficits and increased dependence on oil-related volatility, particularly through Petronas' dividends, will weaken the fiscal profile."