RAM: Plan to trim fiscal deficit by end-2015 is bold and necessary

Published: Tuesday November 12, 2013 MYT 3:50:00 PM 

Updated: Tuesday November 12, 2013 MYT 3:53:35 PM

KUALA LUMPUR: RAM Rating Services Bhd has described the Government's aim of trimming the fiscal deficit to 3% by end-2015, supported by various reforms on revenue generation and expenditure control, as a bold and necessary move.

The Government in Budget 2014 announced the implementation of the goods and services tax (GST) in April 2015, which is expected to lift fiscal revenue while providing a broader and more resilient earnings base, the rating agency said. 

"This is deemed as a bold and necessary fiscal reform by the government and reinforces its commitment to Malaysia's long-term financial health. 

"We have thus maintained our stable outlook on Malaysia's GA2(PI) global-scale rating," RAM's Head of Public Finance Ratings Esther Lai said in a statement today.

However, she said, the expenditure on subsidies is projected to decline 15.7% in 2014. RAM noted better clarity on the pace and type of subsidy cuts will increase the credibility of the rationalisation programme and also help manage price expectations. 

Although these proposed reforms are expected to reduce the nation's fiscal deficit, it will be a challenge for the government to achieve its targeted deficit of 4% of gross domestic product (GDP) by the end of this year, given the deficit of 5.2% as at end of second quarter 2013, Lai said.

Notably, she said, the government has reaffirmed its commitment to its long-term fiscal consolidation targets without breaching its self-imposed debt ceiling of 55% of GDP. 

The Government's debt load is expected to increase to 54.8% of GDP in 2013. 

"Despite this, we derive comfort from the long maturities of Malaysia's sovereign debts and its stable repayment schedule, which reflect a certain degree of flexibility. Moreover, the deep domestic capital markets and the fact that more than 90% of government bonds are ringgit-denominated represent an added advantage. 

"Going forward, we expect growth to clock in at 5.5% in 2014. RAM's Fiscal Report publication released today envisages the economy to be driven by robust private consumption growth in the short term, supported by low unemployment rates and direct cash transfers from the Government. 

"Similarly, private investment is likely to remain strong, with additional policy support for small and medium enterprises and ongoing public projects. 

"On the other hand, we expect a slowdown for the real-estate sector given the government's efforts to curb speculative demand. Over the longer term, we anticipate growth to be driven by Economic Transformation Programme projects, Malaysia's integration into the Asean Economic Community and an improved business environment," she added.

The rating agency projects the country's inflation to climb to almost 3% in 2014, amid expectations of further subsidy rationalisation. 

It also expects Bank Negara Malaysia to adjust the Overnight Policy Rate by 25 basis points in the second half of 2014, to anchor inflationary expectations, maintain financial stability and ensure sustainable medium-term growth. - Bernama