PETALING JAYA – Fitch Ratings, which considers the Malaysian government’s revenue projections optimistic, warned of downside risk to it in anticipation of slower external demand and sensitivity to global oil prices.
The rating agency in its latest report affirmed Malaysia’s sovereign rating at ‘A-’ with a stable outlook in August, but highlighted the importance of continued fiscal consolidation given the government’s high debt ratios.
In contrary, local economists opined that the government’s projections are relatively conservative, which provide room for growth in revenue collection.
Fitch said Malaysia’s 2018 gross domestic product (GDP) growth forecast of 5.0%-5.5% assumes that strong recent momentum will be maintained, but there could be some headwind from cooling external demand.
“The government’s upbeat growth forecast and optimistic revenue collection targets are key to its expectation that direct tax collection will increase by around 7% and GST revenue will rise by 5.5%.”
It noted that any shortfall in revenue collection would most likely be offset by corresponding expenditure cuts to meet the deficit target and therefore unlikely to be big enough to knock it off its deficit reduction path next year.
Having said that, it stressed that the medium-term target of achieving a near-balanced budget by 2020 would require a step-up in consolidation efforts in 2019 and 2020, which is not unattainable.
“We expect the fiscal deficit to continue narrowing over the next few years and project federal government debt – which was 50.9% of GDP in June 2017 – to remain on a downward path and therefore stay below the authorities’ 55% self-imposed debt ceiling, but slightly above the 49% ‘A’ median.”
Meanwhile, despite a dramatic drop in the federal budget’s share of oil and gas revenue in the previous few years, Fitch said Malaysia’s government revenue remains sensitive to oil price movements.
The government forecasts a total dividend of RM16 billion from Petronas in 2017, up from an initially budgeted RM13 billion. It is expected to rise to RM19 billion in 2018.
“This assumes the crude oil price will rise to US$52/barrel in 2018, up from US$50 in 2017, which is broadly in line with our own expectation,” the rating agency said.
Nonetheless, Fitch said Budget 2018 strikes a balance between providing measures that will be popular ahead of an election, and sticking to a path of fiscal consolidation. It said the fiscal deficit of 2.8% of GDP for 2018 is in line with its expectation.
Fitch also foresees that off-budget infrastructure spending may continue to rise, with a corresponding increase in contingent liabilities.