PETALING JAYA: Moody’s Investors Service, which has an “A3” rating and “stable” outlook on Malaysia, opined that Budget 2018 fails to include concrete policy measures to increase revenue, instead relying on the economy to boost income.
“As a result, revenue as a share of GDP (gross domestic product) will continue to fall to levels among the lowest of A-rated sovereigns. Coupled with rising spending in the run-up to elections next year, this risks slowing the pace of deficit reduction and undermining the government’s objective of a balanced budget by 2020,” it said in a statement today.
Moody’s said while the 2.8% fiscal target of GDP for 2018 is expected to be met given the supportive growth and commodity price environment, risks to the budget assumptions for GDP growth and revenue are skewed to the downside.
According to budget assumptions, revenue will continue to decline as a proportion of GDP, to 16.6% in 2018 from 16.8% in 2017, a continuation of the trend seen since 2012 (when revenues stood at 21.4% of GDP), and leaving the ratio among the lowest of A-rated sovereigns.
Moreover, debt as a proportion of revenue will continue to exceed those ratios of similarly rated and even lower-rated sovereigns.
Moody’s said the budgeted pace of revenue growth, if achieved, would be the fastest since 2012, driven by a 6.9% yoy rise in corporate tax collection, which accounts for a third of total revenues.
GST revenue – about a fifth of total revenue – is budgeted to increase 5.5% yoy in 2018 against a relatively low 0.7% rise in 2017.
However, the rating agency said there are no explicit measures to support an increase in collection, instead reliance is on relatively strong consumption growth.
More generally, Moody’s said, the budget relies on the underlying assumption of 5% to 5.5% GDP growth in 2018, from 5% to 5.7% in 2017. “Our own 2018 GDP estimate is at the lower end of this band, based on consumption growth at 6.4%. As a result, we think that the risks to revenue collection are skewed to the downside.”
Although the fiscal deficit reduction will lower the federal government’s debt burden to 51.5% of GDP for 2018 from an estimated 52.5% in 2017, Moody’s said it remains higher than the A-rated median of 40.9% for 2017.
It noted that the 6.6% corporate tax revenue growth target for 2017 is achievable given the uptrend in commodity prices, particularly palm oil and crude oil.