Firm up growth plans in Budget 2019, says MARC


The government’s debt should be addressed through the strengthening of economic growth plans rather than trimming expenditure, Malaysian Rating Corp Bhd (MARC) opined.

In an economic research report yesterday, the rating agency noted that the budget deficit targets could be revised upwards to between 3.5% and 3.8% of GDP for 2018, but will be reduced to 3.4% of GDP in 2019.

“MARC sees this spike in budget deficit as a one-off event as the government implements measures to repair its balance sheet.

“Further increases in the government’s contingent liabilities will be avoided,” it said.

The report forecast a real GDP growth of 4.6%, an inflation rate of 2%-2.5%, a government budget deficit of 3.4% of GDP, a current account surplus of 2%-2.5% of the gross national income and an Overnight Policy Rate (OPR) of 3%.

“A slight adjustment in the OPR is possible, if the headline growth starts to skid towards the bottom range of 4%. This is in view of the fact that i) inflation is expected to be well contained in 2019; and ii) fiscal policy is constrained by budget deficits. The Statutory Reserve Requirement could also be adjusted downward in an effort to enhance liquidity support,” the report read.

Anxiety over a possible adjustment in the country’s sovereign rating outlook by international credit rating agencies (CRAs) could also resurface.

“Key to Malaysia’s future rating and rating outlook are CRAs’ medium-term assessments of its budgetary landscape and debt position. A convincing and detailed narrative of how the new fiscal trajectory will pan out in the near term is critical to give comfort to the CRAs,” MARC noted.

The main focus of the investment fraternity will instead likely be on the ringgit’s future trajectory as attention will be on the market’s reaction towards a medium-term budget deficit trajectory, the government’s new revenue- generating measures and new growth forecasts.

MARC expects Budget 2019 to focus on strengthening medium-and long-term economic fundamentals by alleviating imbalances that had accumulated over the past few years.

The government’s focus on improving fiscal health and reducing debt would mean total expenditure will be further rationalised.

“The proposed allocation for development expenditure in Budget 2019 could be lower than the average of past budgets.

“MARC expects the government to push for higher utilisation of the budgeted allocation in 2019,” the report read.

MARC said there is a need to raise additional revenues in the medium-and long-term, due to the loss in revenue from the abolishment of the Goods and Services Tax.

“Several options have been discussed including taxes on foreign providers in the digital economy, higher stamp duties for property transactions by foreigners, sin taxes, etc. Current tax incentives given to different industries could be made conditional (ie based on productivity improvements).

“Inheritance and capital gains taxes may not be considered in the near term, as more studies are required to assess the effectiveness and repercussions of their implementation on the capital market and the economy,” read the report.