KUALA LUMPUR, Aug 21 — Malaysia has yet to present a convincing plan to tackle the twin fiscal threats of its federal budget deficit and federal debt even though strains on its credit profile are increasing said Fitch Ratings in a report yesterday.
Fitch also said that data clearly shows public sector-linked activity has been a key driver of GDP growth for the last four quarters alongside robust private sector activity.
It said that the ratio of federal government debt to GDP reached 51.8 per cent at end-2011 despite strong GDP growth but barring a further deterioration in the global economy, the Malaysian government should be able to meet its 2012 deficit target of 4.7 per cent of GDP.
“Looking beyond this year, however, the Malaysian authorities have yet to outline a credible near-term plan to reduce the fiscal deficit to three per cent of GDP, and the debt/GDP ratio to 50 per cent, by 2015, in line with their official targets,” said Fitch.
The ratings agency noted that Malaysia’s public finances already compare poorly with its similarly rated peers in both the ‘A’ and ‘BBB’ range medians and added that improving the nation’s fiscal position will be challenging without significant reform to address the cost of fuel subsidies, broaden the fiscal revenue base, or reduce dependence on energy-linked revenues.
“Without such reforms, our base case is that the debt/GDP ratio will continue to rise until 2016,” said Fitch. “The federal debt ceiling of 55 per cent of GDP, which was increased from 45 per cent in July 2009 to accommodate fiscal stimulus, suggests that the room for fiscal slippage may be limited without further alteration to the debt ceiling. If this were to happen, it would apply additional negative pressure on Malaysia’s credit profile.”
It said, however, that Malaysia still possessed several strengths such as a track record of macroeconomic stability, a strong net external credit position, and funding flexibility.
Malaysia reported a surprisingly strong second-quarter economic growth of 5.4 per cent despite weakening exports largely due to the buffer of ongoing construction projects and increased spending attributed to civil servant salary hikes and government cash handouts said economists.
They added that the difference in performance between the domestic and export sectors could point to uneven growth in the months ahead and lead to a two-speed economy.
While the Najib administration’s efforts to help tide the country over the rocky global economic environment with a longer term goal of transforming the country in a high income nation by spending more on salary hikes and kick-starting large infrastructure projects has helped boost GDP growth, analysts have noted that its debt has outgrown revenue since 2007.
Figures from the Federal Treasury’s Economic Reports show that the federal government’s domestic debt almost doubled in the space of less than five years — from RM247 billion in 2007 to an estimated RM421 billion in 2011 — far outpacing its revenues which only grew 31 per cent, or from RM140 billion to RM183 billion, during the same period.
While the Najib administration has vowed not to let federal government obligations exceed 55 per cent of the country’s GDP, there is increasing worry that when government-backed loans or “contingent liabilities” are taken into account, the government’s total debt exposure has already risen to about 65 per cent of GDP last year.
Fitch earlier warned that the country is now on par with more heavily indebted ‘A’ range sovereigns, such as crisis-hit Italy, on some measures like debt-to-revenue ratio and a lack of progress on fiscal reforms and may lead to a ratings downgrade which could push up the country’s borrowing costs.
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