Budget focused on expenditure restrain, not structural reforms

October 26, 2013

Moody's Investor Services Singapore also noted that the budget lacked a timeframe to revise the fuel subsidy framework

SINGAPORE: Overall deficit consolidation underlined in Budget 2014 tabled by Prime Minister Najib Tun Razak yesterday while supporting the stable outlook on Malaysia’s A3 sovereign rating did not offer structural reforms to bring it down.

Moody’s Investor Services Singapore Pte Ltd senior analyst-cum-vice president Christian de Guzman said Najib, in his budget speech, had held to his previously stated aims to work towards deficit consolidation and to keep the federal government’s debt under 55% of gross domestic product (GDP).

“However, the budget seemingly focused on expenditure restraint, rather than structural reforms that could help to permanently bring down the deficit – with the exception of the announcement of the Goods and Services Tax (GST),” he said.

In particular, he said, the budget was notable for the lack of a timeframe to revise the fuel subsidy framework.

In other words, De Guzman said, the path towards structurally lower deficits was not well articulated, thus subjecting that path to execution risks.

“Nevertheless, the overall trend of deficit consolidation — although slow — supports the stable outlook on Malaysia’s A3 sovereign rating,” he stressed.

It was reported earlier that Moody’s Investors Service in its annual credit analysis said Malaysia’s A3 sovereign rating — with a stable outlook — is anchored by resilient growth and a strong external position, although debt levels continue to rise as deficits remain relatively wide.

The stable outlook balances the initial gains from the government’s efforts at administrative reform and economic restructuring against structural weaknesses in the government’s finances.

De Guzman said the inflationary impact of the GST implementation should be muted given that it is largely a replacement tax, pointing out that many important items represented in the Consumer Price Index (CPI) basket, such as basic food items, water supply and public transportation, will be exempt from the GST.

“Moreover, inflation expectations are well anchored in Malaysia due to Bank Negara Malaysia’s (BNM) solid track record of maintaining low inflation,” he added.

The GST is a new tax structure replacing the sales and services tax and is not an additional tax, while its rate, at six percent, is the lowest among Asean countries.

-Bernama