Govt needs to juggle fiscal balance for budget

Published: Saturday August 17, 2013 MYT 12:00:00 AM 

Updated: Saturday August 17, 2013 MYT 7:16:45 AM

MAKING A POINT BY JAGDEV SINGH SIDHU

THE big three rating agencies recently cast their verdict on Malaysia’s credit rating and it was the opinion of Fitch Ratings that shook the markets.

Fitch basically downgraded its outlook for Malaysia, casting doubt over the Government’s ability to be fiscally responsible at a time when the fiscal debt to GDP ratio seems to be going up. It also seems worried over the ability of the Government to rein in the fiscal deficit.

Both Standard and Poor’s (S&P) and Moody’s kept their outlook on Malaysia.

While all three did not downgrade the country’s credit rating, they each voiced a similar concern.

While they exposed the positives about the Malaysian economy, they are all keeping on eye on the fiscal situation.

“We may lower the ratings if the government fails to deliver reform measures to reduce its fiscal deficits and increase the country’s growth prospects. These reforms may include implementing the GST, reducing subsidies, boosting private investments, and diversifying the economy,” says S&P in its note on July 26.

Moody’s warning of a reason for a downgrade seems eerily similar.

“The rating could come under pressure from a deterioration in government financial strength, possibly arising from ineffective policies or the lack of fiscal reform,” says Moody’s in its assessment of Malaysia’s credit position on Wednesday.

Moody’s in its note says that fiscal transfers ahead of the May elections contributed to the Government’s expenditure growth, while revenues were constrained by the relatively weak performance of the commodities sector.

“Consequently, the federal government registered a fiscal deficit of RM14.9bil in the first quarter, up from RM5.8bil in the same period in 2012. The current (or operating) budget deficit in the first quarter was RM6.1bil, the second largest quarterly deficit ever recorded for this account. The size of this deficit this early in the year places at risk the government’s stated goal of achieving a full-year balance or surplus for the current budget. The federal government has achieved this goal every year since 1987,” says Moody’s.

The Government has said it will unveil fiscal reforms during the upcoming budget in October. It will be interesting to see just what it has in store and the possibility of introducing a Goods and Services Tax (GST) appears to be growing following what the rating agencies have said.

I have commented before that the way expenses have ballooned is disconcerting. The problem is that revenue seems not be growing as fast.

Should the Government clamp down on its expenditure and introduce new taxes to beef up revenue, it will hit domestic demand.

The problem is made worse by recent measures to curb the growth in household debt. With household debt at a terrifying level for a country like Malaysia, the move to throttle the rise in such debt was welcome.

But like a curb in expenditure, lowering household debt will affect consumption and directly domestic demand.

With exports already hit so far this year, things are not looking all too good for the economy.

The hope is that the control on expenditure will be gradual and not affect the economy in a bad way. The reality is that there is a price to pay for years of excesses and the consequence is that something will have to give as the spending eases.

Business Editor (Features) Jagdev Singh Sidhu feels that any end to the spending spree will be justified. Focus should be on investments and productivity as a means to drive the economy.