No change in Malaysia’s sovereign rating as the country tackles deficits

A downgrade by international rating agencies is unlikely to happen, according to expert


Malaysia’s credit rating is not expected to fall if the government puts down detailed plans and strategies to consolidate the country’s widening fiscal deficits.

Affin Hwang Investment Bank Bhd chief economist Alan Tan Chew Leong (picture) said despite the concerns surrounding the ballooning fiscal deficits, a downgrade by international rating agencies is unlikely to happen.

“The country’s sovereign risk will likely avoid possible downgrades by international rating agencies if the government is committed to fiscal discipline,” Tan said in a media briefing by Affin Hwang on Budget 2019 in Kuala Lumpur yesterday.

“There is a possible reset in the country’s fiscal deficit target to a higher level, but the government needs to ensure that the country’s budgetary position will not get larger due to possible shortfall in tax revenues receipts, especially from direct taxation,” he added.

Tan said while the government would need to depend on collection from direct taxation, revenue sources from direct taxes are vulnerable to external influence and fluctuate based on the world economic situation.

He said Malaysia will have to rely on internally-generated growth.

“We believe that a practical and reasonable budget will address structural problems such as the country’s budget deficits, but other strategies are required to sustain economic growth.

“The budget proposal should aim at stimulating private consumption and domestic demand, as well as incentives for businesses to support corporate profitability,” he added.

Although no reduction of corporate tax is expected for Budget 2019, Affin Hwang believes that the government will promote private investments by introducing fiscal incentives such as the extension and expansion of reinvestment allowance.

“We believe any reduction in the corporate tax rate will likely take effect from subsequent years after the government’s revenue starts to increase steadily,” Tan said.

Taking into consideration the unpaid tax refund and revenue foregone from the abolishment of the Goods and Services Tax, based on Affin Hwang’s estimates, the government will incur a larger revised budget deficit of 3.6%-3.8% of the GDP estimated for 2018.

For 2019, the research arm has estimated deficits of between 3.3% and 3.5% of the GDP.

The government had assured that measures will be taken to strengthen the fiscal position in the medium term — by strengthening the management of public debt and accelerating institutional reforms, among others.

In terms of new taxes as revenue sources, Affin Hwang believes that it is unlikely for the government to announce an inheritance tax and capital tax during the upcoming budget tabling as studies are ongoing.

“Implementation on an inheritance tax and capital tax won’t be too soon, as the Tax Reform Committee has just been established,” Tan said.

According to him, the market had speculated a number of possible taxes that include an inheritance tax, capital gain tax, health and environment tax (soda and carbon tax), as well as a
digital tax.

Affin Hwang suggests that a digital tax could be possibly announced in Budget 2019 as it may benefit the government on the back of increasing usage of the Internet for online shopping, as well as entertainment streaming services.

As for foreign investments, Tan said while pessimism among investors persists — especially on the country’s economic outlook and the ringgit’s performance — there would be more inflows into the country in the final quarter of this year.

Economic growth, on the other hand, is anticipated to be sustained at the higher end of the range between 4.5%-5% in 2019 and 5% in 2018.

“We expect the current account surplus to remain substantial and continue to be a feature of the economic fundamentals in Malaysia, together with a healthy international reserves level,” Tan said.

He also said if there are no major short-term initiatives and measures to boost domestic demand, Tan expects growth in the domestic economy to be sustained in 2019.