Fitch sees pressure on Malaysia’s credit profile from public finances

Thursday, 09 August 2012 14:03
Anuja Ravendran

Malaysia will have to reduce its heavy dependence on petroleum-linked revenue and implement the Goods and Services Tax (GST) due to concerns on weakening public finances, a global sovereign credit rating agency said.

There are growing strains on the country’s credit profile, Fitch Ratings said yesterday. “Fitch Ratings is concerned that negative pressures may build and eventually offset the existing strengths of the sovereign credit profile unless structural weaknesses in the public finances are addressed,” it said in a special report on ”Malaysian Public Finance”.

However, it said efforts to address the underlying structural weaknesses within Malaysia’s public finances will be limited until after the general election as policymakers’ foremost concern lies in winning favour with the electorate, especially after the ruling coalition Barisan Nasional lost four states in the 2008 elections.

On Malaysia’s fiscal deficit pattern, Fitch said that despite having narrowed its deficit in 2011 to 4.8% of gross domestic product (GDP), the gains were offset by a higher personnel expenditure and “higher-than-expected” subsidy due to high global oil prices.

It added that the 2012 budget faces headwinds from global developments and the unrevised original deficit target of 4.7% of GDP for 2012 may be difficult to achieve if the world economy worsens.

It said that Malaysia’s public finances fare poorly when compared to both ‘A’ and ‘BBB’ range medians, and in some cases are comparable to more heavily-indebted sovereigns.

Fitch had previously stated that measures to enhance the overall revenue base and reduce Malaysia’s energy dependence would be positive for the current ratings.

“One measure the government has long discussed is the GST. Its implementation has been delayed on a number of occasions. Without it, Malaysia has been unable to arrest the structural decline in non-oil revenues since the Asian financial crisis of the late 1990s,” it said.

It noted that Malaysia’s revenue base is narrowed and overreliance on oil-linked revenues “does not help”.

Despite its earnings potential from high oil prices, a combination of strong domestic energy demand, supported by extensive subsidies, and limited investment in the oil and gas sector over the last decade suggest the net benefits accrued are becoming smaller, it said.

This exposes the country to greater volatility in earnings, it said. Fitch also raised concern on the country’s closeness to its debt ceiling.

“Despite strong GDP growth in 2010 and 2011, the continued rise in the federal government debt/GDP ratio to close to the existing debt ceiling of 55% suggests there is limited room for fiscal slippage under the current framework,” it said.

It added that Malaysia’s debt dynamics are unfavourable and based on Fitch’s current base case scenario, federal government debt will continue to rise.

“Malaysia’s extreme level of trade openness (exports are equivalent to 90% of GDP) and existing high public debt stock leave it exposed to a further sharp increase in public debt ratios in the event of an interest-rate and/or growth shock, as happened in 2009,” it said.