Published: Wednesday September 4, 2013 MYT 12:00:00 AM
Updated: Wednesday September 4, 2013 MYT 7:22:24 AM
BY YVONNE TAN YVONNE@THESTAR.COM.MY
PETALING JAYA: Malaysia’s measures, announced on Monday to lower fiscal subsidies and limit import-intensive investment, did not impress Fitch Ratings enough for it to change its perception of the country.
Fitch Ratings had downgraded Malaysia’s sovereign credit rating outlook in July to “negative” from “stable”, saying that it reflected the rating house’s assessment that prospects for budgetary reform and fiscal consolidation to address weaknesses in public finances had worsened since the Government’s weak showing in May’s general election.
The rating agency said in a statement yesterday that the corrective fiscal measures announced were “too small” to alter the negative outlook.
On Monday, the Government announced that the price of RON95 petrol and diesel had been increased by 20 sen, translating into RM1.1bil of savings from September to December this year and RM3.3bil annually.
Collectively, this RM4.4bil in savings is equivalent to 0.4% of GDP.
This is seen as the first step towards the rationalisation of subsidies by the Government in a bid to reduce the country’s persistent fiscal deficit.
“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,” said Fitch Ratings.
Maybank Investment Bank Research pointed out that the continuing BR1M, or the1Malaysia People’s Aid, could possibly dilute the fiscal deficit impact and eat up fuel subsidy savings.
To ease the burden on low-income and vulnerable groups in the fuel subsidy rationalisation, Prime Minister Datuk Seri Najib Tun Razak said the quantum for the BR1M would be increased in Budget 2014.
“While the total savings in fuel subsidies appear positive, bear in mind that there is also the cost of continuing the BR1M, which is expected to be funded from savings on subsidies,” said Maybank.
In its report, Maybank said subsidy rationalisation details, the implementation of the Goods and Services Tax (GST) by 2015 as well as a potential third round of hikes in the real property gains tax (RPGT) could be announced in the upcoming Budget 2014 as part of the Government’s plan to address the fiscal deficit issue.
It also noted that “eyes” would be on Government land development projects in view of the worsening macroeconomic balance.
The Government’s target is to reduce the country’s budget deficit to 4% of gross domestic product (GDP) this year and 3% in 2015. In 2012, it stood at 4.5% of GDP.
Meanwhile, another economist has suggested that the Government draw up a timeline of action in order to execute its fiscal consolidation measures while conducting a review of its expenditure.
CIMB Research chief economist Lee Heng Guie said in a note to clients that a timeline of action was necessary to assure investors that the Government had the political resolve to address the country’s fiscal issues “without delay”.
While the (fiscal consolidation) measures were commendable, a senior economist questioned why is it that the Government was only addressing the issue after Fitch Ratings had downgraded Malaysia’s sovereign credit rating.
“Why did we not bite the bullet two years ago? We should have addressed this issue earlier to avoid getting to this stage.”
CIMB’s Lee called for a fundamental review to “weed out” the country’s non-developmental, low-priority and unproductive expenditure, while focusing on growth-oriented spending.
He added that more cost-saving initiatives, including a critical review and reform of the procurement system to combat wastages and leakages, must be implemented.
In its statement, Fitch Ratings said the timing of Monday’s announcement seemed responsive to heightened global market volatility brought on by impending tapering by the Federal Reserve and greater investor scrutiny of vulnerabilities in emerging markets.
“A more calibrated pace of public investment prioritising non-import-intensive projects should limit the risk of near-term fiscal overruns as well as lower the likelihood of the current account slipping into a deficit.
“We estimate that Malaysia’s current account surplus would fall – sharply – to 3% of GDP this year after averaging 11% over 2009-2012.”
It opined 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.”
Fitch Ratings said if this were to materialise, then 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 also noted that the political position of the ruling coalition had weakened following the May election, meaning that the Government was likely to continue encountering difficulties in implementing “far-reaching and much delayed” revenue-enhancing reforms such as the GST.
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