Fitch welcomes fuel subsidy cut, warns more is needed

Published: Tuesday September 3, 2013 MYT 5:32:00 PM 

Updated: Tuesday September 3, 2013 MYT 5:34:56 PM

KUALA LUMPUR: Fitch Ratings welcomed the Malaysian Government’s move cut back on fuel subsidy and rein in import-intensive projects but warned that more needed to be done to address the country’s deteriorating public finances.

The ratings agency said the measures announced on Monday were “credit-neutral” over the near term as they were consistent with its fiscal projections, which had already factored in a net 1ppt of GDP reduction in government expenditure in its fiscal projections for the period to 2015,

“The fundamental driver of the narrowing current account surplus has been the widening public sector deficit, drawing attention to the health of medium-term public finances,” it said.

However, it cautioned that effective fiscal consolidation in the next 12 months would by no means be easy.

“First, the Malaysian economy is undergoing a terms-of-trade shock, with the prices of key commodity exports falling sharply. In this environment, expenditure restraint could raise downside risks to our GDP growth forecasts of around 5%, year-on-year, in 2013-2014.

“If this were to materialise, slowing growth could also lower tax receipts, making it that much more difficult to achieve the medium-term government deficit target of 3% of GDP by 2015.

It added that a second reason the road ahead would be difficult was that politically the government would likely face difficulties in implementing far-reaching, and much delayed, revenue-enhancing reforms such as the Goods & Services Tax (GST).

“The upshot is that the corrective fiscal measures, announced yesterday, are too small to alter the Negative Outlook on Malaysia's 'A-' sovereign rating. Sustained reform implementation, if accompanied by structural measures to broaden the revenue base, could make a difference to the sovereign's credit profile.

“But such an intensification of reforms that can also withstand potential growth headwinds, is not on the cards at present,” Fitch Ratings said.