BY CLARA CHOOI
ASSISTANT NEWS EDITOROCTOBER 28, 2013
|Prime Minister Datuk Seri Najib Razak is pictured before the |
tabling of Budget 2014 in Parliament in Kuala Lumpur on October 25, 2013. — Picture by Saw Siow Feng
KUALA LUMPUR, Oct 28 — Fitch Ratings has lauded steps taken by Putrajaya in Budget 2014 to slash the government deficit and widen its tax base with the new goods and services tax (GST) scheme, but said today it will not revise its “negative” outlook on Malaysia’s credit profile as yet.
The ratings agency pointed out that while these were “potentially constructive steps”, Putrajaya’s budget management must first be monitored to ensure it stays on track in its commitment to keep its deficit level at 3.5 per cent of the Gross Domestic Product (GDP) next year and 3 per cent by 2015.
“A track record of budget management remains key to limiting further credit pressure on the sovereign rating,” Fitch said in a report on international wire agency Reuters today.
In July, Fitch had cut its outlook on Malaysia’s sovereign debt to “Negative”, citing gloomier prospects for reforms to tackle the country’s rising debt burden following a divisive election result this year.
The revision from a stable outlook had added to concerns over Malaysia’s high debt pile at a time when the currency has been pressured by bond fund outflows and talk of the US Federal Reserve ending its easy monetary policy.
Since then, the government has been put on the spot to introduce the necessary reforms to demonstrate that it is steering the country’s economy in the expected direction.
Last month, it cut consumer subsidies to RON95 petrol and diesel by 20 sen a litre, raising their pump prices to RM2.10 and RM2.00, respectively.
It was also reviewing major infrastructure projects and prioritising those with low-import content and high-multiplier effects for the economy, while possibly shelving those that did not meet the criteria.
When tabling Budget 2014 last Friday, Prime Minister Datuk Seri Najib Razak announced more steps to keep to his government’s promise for fiscal prudence, including restating the commitment to trim the budget deficit.
Apart from this renewed pledge, Fitch also lauded the federal government’s budgeted reduction in subsidy expenditure. In his budget speech, Najib had announced immediate plans to stop subsidising sugar by the current 34 sen/kg.
“However, Fitch points out that the steps to achieving this outcome are not yet fully identified, and remain subject to external shocks,” the ratings firm said.
Fitch also sang praises for Putrajaya’s plan to implement the GST beginning April 2015 at an initial rate of 6 per cent, saying it felt this is a “key reform” that could strengthen Malaysia’s credit profile by widening its tax revenue base and lessening the budget’s dependence on petroleum money.
The GST is a consumption tax, meaning all Malaysians will be taxed according to their level of spending, regardless of income. This differs from income tax that is only applicable after a certain salary level is exceeded.
Malaysia’s proposed GST rate of 6 per cent is the lowest in the region, whereas most countries implement a 10 per cent value added tax (VAT).
The tax was first announced during Budget 2005 and was originally scheduled to be implemented in 2007 before it was deferred.
But despite agreeing with the contentious tax scheme, Fitch said implementation was still key and Putrajaya must stay on track towards lowering its budget deficit.
“We will look, however, for a track record of implementation towards the stated goal of deficit reduction (as a percentage of GDP) — backed by subsidy rationalisation and GST introduction over 2014-2015 — hence, the ratings remain on Negative Outlook,” Fitch said.
But the ratings firm added a warning over whether Malaysia could avoid the emergence of twin public and external deficits, despite its budgetary reforms.
“As we have previously highlighted, the rapid erosion of Malaysia’s current account surplus has been driven partly by a drawdown of public-sector savings as well as by increased investment.
“The slippage of the current account position into deficit could increase Malaysia’s vulnerability to renewed market tensions when Fed tapering becomes more likely,” Fitch said.
Malaysia’s current-account surplus had narrowed to RM900 million in the second quarter from RM8.7 billion in the preceding period, according to a Bloomberg survey in August. This was its lowest level since the 1997 crisis 16 years ago.
Fitch had also previously noted the rapid rise in federal-guaranteed debt to 15 per cent of the GDP by end-2012 from just 8 per cent of the GDP by end-2008.
“This is an area of the public finances that we will monitor beyond the budget,” Fitch said.
“The upshot of all this is that budget deficit reduction is heavily reliant on expenditure restraint, and a track record of sound budget management and implementation will be integral to our assessment.”
- See more at: http://www.themalaymailonline.com/malaysia/article/ratings-caution-remains-in-place-as-fitch-monitors-malaysias-budgetary-refo#sthash.3H4GG3Ke.dpuf