Malaysia likely to face downside risk, says Fitch

By SHAHEERA AZNAM SHAH / Pic By BLOOMBERG

Downside risk is likely to take place over the government’s optimistic revenue projections revealed in the Budget 2018 tabled recently, said Fitch Ratings Inc.

According to the international based credit rating agency, Malaysia will likely face some financial pitfalls due to the softer global demand.

“The economy — that was forecast to increase between 5% and 5.5% from the previous year — maintained a strong momentum, but there might be some headwinds from cooling outside demand,” Fitch said in a statement yesterday.

It added that the revenue deficiency through tax collection will most likely be compensated by the declining expenditure allocated to meet the deficit target.

“The government’s hopeful growth forecast and optimistic revenue collection will see the direct tax collection to increase by 7%, while the Goods and Services Tax (GST) collection will rise by 5.5%.

“Also, the shortfalls in revenue collection will probably be offset by corresponding expenditure cuts due to achieving the deficit target,” it said.

Budget 2018 revealed that the federal government’s revenue collection is likely to list at RM239.86 billion next year, while the GST collection is projected to increase to RM41 billion from the RM30 billion generated in Oct 16, 2016.

Fitch added that the federal budget for 2018 was set up on a moderate course between slanting towards electorate benefits for the upcoming general election, which must be called before August next year, and conforming to the fiscal consolidation.

“The operating expenditure for the country is set to go up by 6.5%, which includes a substantial support plan for the rural sector plus payouts to public-sector workers, not to mention pensioners.

“The off-budget infrastructure spending may also to be continued to rise, with a corresponding increase in contingent liabilities and strong infrastructure funding in 2017.

“The government expects these measures to be more than to boost the country’s revenue as the income tax rate will be cut by two percentage points for the middle-income workers,” it said.

The rating agency also noted that the federal government’s deficit target for 2018 — which has been set at 2.8% in gross domestic product (GDP) — is in line with its projection, despite slight reduction from the government’s projected outcome of 3% in 2017.

“We do not believe that the fiscal deficit target is enough to knock the government off its deficit reduction path next year.

“The medium-term target of achieving a near-balanced budget by 2020 would require a step-up in consolidation efforts in 2019 and 2020, but is not unattainable.

“We expect the fiscal deficit to continue narrowing over the next few years and project federal government debt — which was 50.9% of GDP in June 2017 — to remain on a downward path, and therefore, stay below the authorities’ 55% self-imposed debt ceiling, slightly above the 49% ‘A’ median,” it said.

On top of that, the rating agency said the country’s revenue will still be affected by the oil and gas (O&G) price movements amid the instability the industry is facing at present.

“The Malaysian government’s revenue will remain sensitive to the oil price movements, despite the dramatic drop in the government’s share of the O&G revenue in the past years.

“The government forecast dividends from national oil and gas company Petroliam Nasional Bhd to total RM16 billion (US$4 billion) in 2017, up from the initially budgeted RM13 billion, before rising to RM19 billion in 2018.

“This assumes the crude oil price will rise to US$52 (RM219.96) per barrel in 2018, which is an increase from US$50 in 2017,” it said.