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Friday, November 1, 2013

Unconvinced, ratings agencies hold Malaysia’s outlook

A man watches a live television broadcast of Prime Minister Datuk Seri Najib Razak
tabling Budget 2014 in Parliament in Kuala Lumpur October 25, 2013. — Picture by Choo Choy May
KUALA LUMPUR, Oct 30 — Unconvinced by insufficient subsidy cuts announced in Budget 2014, ratings agencies have adopted a wait-and-see approach this week before making any revision towards Malaysia’s sovereign debt outlook and ratings.

While the agencies have noted Malaysia’s commitment to reform by announcing sugar subsidy cuts in the budget, they remain sceptical that the fuel subsidy cut announced in September will be enough for Putrajaya to achieve its 2014 target.

“Moody’s Investors Service says that Malaysia’s proposed 2014 budget with its call for fiscal consolidation and reform of the country’s subsidy system would, if fully implemented, be credit positive for the government’s finances,” said Christian de Guzman, vice president and senior analyst of Moody’s Investors Services in a statement here.

“At the same time, Moody’s says that structural fiscal weaknesses will remain, and execution risks will present challenges to the effectiveness of the government’s fiscal policy strategy.”

Standard and Poor’s (S&P) Ratings Services also concurred with Moody’s, saying that the 3.5 per cent of gross domestic product (GDP) deficit target for 2014 outlined in the budget matches its expectations over the medium term.

“In our view, Malaysia’s slow fiscal consolidation stemmed from its relatively weak revenue structure and an inability to reduce high subsidies. Budget 2014 and 2015 could begin to reduce concerns arising from these issues,” said S&P in a statement.

Moody’s and S&P both maintain Malaysia’s rating of “stable”.

On Monday, Fitch Ratings 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 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 GDP next year and 3 per cent by 2015.

According to S&P, while the GST will diversify Malaysia’s revenue base, it expected the tax to bring no new revenue for the first few years resulting from other revenue-reducing measures Putrajaya has announced in Budget 2014.

Moody’s pointed out that Malaysia’s plan to reduce deficit is mainly driven by spending cuts rather than increasing its revenue, but that will be hampered by a reduced development expenditure which will impact 2014’s GDP growth negatively.

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.

During the tabling of Budget 2014 on Friday, Prime Minister Datuk Seri Najib Razak said Putrajaya would stop subsidising sugar by the current 34 sen per kg, in a move that may cause cascading price hikes.

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.

However, World Bank economist Dr Frederico Gil Sander predicted on Monday that there is bound to be at least one more fuel subsidy cut in 2014, in order for Malaysia to achieve its subsidy rationalisation numbers.

In September, Maybank Investment Bank (IB) Research predicted that gas and electricity prices are likely to be next in a round of price hikes following the fuel subsidy cut.

In its daily report, Maybank IB had predicted further subsidy rollbacks since the total savings from the Performance Management and Delivery Unit’s Subsidy Rationalisation Roadmap in 2010 has been much less than intended.

Launched in May 2010, the roadmap detailed a five-year period of subsidy rationalisation to save RM103 billion by cutting subsidies mostly for fuel (petrol, diesel, liquefied petroleum gas), gas, electricity, toll roads, and food (sugar, flour, cooking oil).

Since then, gas prices and electricity tariffs have been raised only once in June 2011, and sugar subsidy was cut once too in September 2012.

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.

Malaysia runs a relatively high government debt of 53 per cent of its gross domestic product (GDP) ― just under the legal ceiling of 55 per cent ― and has one of Asia’s highest household debt levels, at over 80 per cent of GDP.

Putrajaya has stated that it aims to reduce its budget deficit-to-GDP ratio to 4 per cent this year and gradually to 3 per cent by 2015.

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