PETALING JAYA – Standard Chartered Research (StanChart) expects the Malaysian government to target a fiscal deficit of 3.0% of gross domestic product (GDP) in 2017, with limited room to reduce the gap in a more meaningful fashion due to a slow economic environment and lower oil prices.
It expects the government to continue its fiscal consolidation efforts which began in 2009 but noted that deficit reduction may be limited in a challenging revenue environment. The fiscal deficit target for this year was 3.1% of GDP.
StanChart said revenue growth in the first eight months of this year may be a good indicator of the challenging revenue environment in 2017. Revenue for the first eight months of 2016 reached only 62% of the revised revenue target (based on an oil price of US$35 per barrel) of RM217.9 billion (versus 65% in the first eight months of 2015).
“While we forecast higher oil prices for 2017, the government may project a conservative estimate considering the uncertain oil price outlook. Key domestic concerns include the cost of living, and housing and urban issues, according to a government survey,” said StanChart.
Recent budgetary news has focused on providing more support for lower-income households, although the government is aware that it has to be fiscally prudent. It may also implement measures to support affordable housing.
As such, StanChart said, fiscal transfers such as BR1M (currently at 2.7% of current expenditure) may rise further. The government may have to balance social spending with the need to maintain capital expenditure, within a tight revenue situation.
Meanwhile, even though fiscal revenue has been running slower year-to-date than in previous years, the government remains confident about meeting its 2016 fiscal deficit target, according to comments by the finance minister II.
“We believe the budget announcement is neutral for the rates market in the medium term, although gross supply may increase modestly due to higher Malaysian Government Securities (MGS) redemptions of RM47 billion in 2017, versus RM26 billion in 2016.”
Redemptions of Government Investment Issues (GII) will amount to RM20 billion in 2017, versus RM33 billion in 2016.
Based on the 2017 fiscal deficit target of 3.0% of GDP, StanChart estimates gross borrowings of RM107 billion – new funding needs of RM40 billion and MGS and GII redemptions of RM67 billion. It also expects the government to split gross issuance of MGS bonds and GII 55:45, versus 51:49 in 2016.
“We stay positive on MGS, as local demand for long-end bonds remains healthy due to high cash on hand,” it said.