The budget deficit trajectory will hinge on the continuing prudent management of opex and additional sustainable income streams
By SHAHEERA AZNAM SHAH / Pic By BLOOMBERG
The impact of Malaysia’s economy will depend on its actual expenditure in 2019 despite the country’s robust budget for the year, Malaysian Rating Corp Bhd (MARC) said.
The rating agency said the country’s utilisation rate of the national expenditure was only 89% of the initial budget, while the actual spending of development expenditure was about RM5 billion less per annum in the past 10 years until 2017.
“New revenue-generating measures proposed in the national budget such as the service tax on imported services, real property gains tax and departure levy, are meant to buffer government coffers against the drop in income following the abolishment of the Goods and Services Tax.
“However, we think that these measures are not too robust and will not have an adverse impact on private consumption and business spending. Their contribution to overall revenue will not be too significant,” it said in an economy report titled, “Budget 2019: Getting Finances Back on Track”.
The rating agency added that the projected tax revenue growth of only 0.8% in 2019 is significantly lower than the annual pace recorded between 2010 and 2018, which was 6% on a compound annual growth rate basis.
MARC said in 2019, the country is expected to briefly rely on contributions from oil-related income, particularly during the high demand of crude oil, before the revenue of the new taxes start to materialise.
“Overall revenue projection for 2019 is boosted by a one-off special dividend by Petroliam Nasional Bhd (Petronas), which is RM30 billion.
“As contributions from the new taxes will take time to fully materialise, we expect the government to temporarily rely on oil-related income, especially at a time when crude oil prices are relatively high,” it said, adding that the government is expected to seek further avenues to broaden its revenue base.
MARC noted that the nation’s deficit target of 3% of GDP is achievable by 2020, if the average crude oil prices maintain above US$60 (RM252) per barrel and the GDP growth remains on its trajectory between 4.5% and 5.5% in the next two years.
“The notable increase in budget deficit projections is in line with our estimates and this one-off adjustment is necessary to repair the country’s balance sheet and does not, in any way, imply fiscal profligacy.
“But, in the longer term, the budget deficit trajectory will hinge on the continuing prudent management of operating expenditure (opex) and additional sustainable income streams that the government could introduce,” it said.
Still, MARC pointed out that the country’s medium-term financial liabilities will also hinge on the government’s decision to fulfil its election pledge to abolish tolls.
“The pressure to provide substantially increased compensation to toll road concessionaires in the future is unlikely to abate.
“The decision to grant toll concessionaires a reprieve will give the government an important breathing space to find a more robust solution to address the impact of rising tolls on households and the federal budget,” it said.
MARC also mentioned that Malaysia’s sovereign rating is unlikely to have a significant impact despite a weaker credit profile over the revised deficit and debt levels.
“Our rationale is that the one-off spike in the deficit target is the result of measures to get finances back on track, not because of fiscal profligacy.
“However, the perceptions of a possible adjustment in the country’s sovereign rating outlook could linger as concerns over the sustainability of revenue in the medium term persist in view of a possible moderation in global crude oil prices,” it said.
On a positive note, MARC said others measures tabled in the national budget such as for the capital market will further assist the funding needs and will pose a significant impact to the overall economy.
“The measures include the double- tax deduction incentives for additional expenditure incurred on the issuance of sukuk under the principles of Ijarah and Wakalah, and of that incurred on the issuance of retail bonds and sukuk, which have been extended for another three years.
“We are of the view that corporates that tap into the sukuk markets to meet refinancing demands will be among the main beneficiaries of these incentives, based on our estimates of corporate debt scheduled to mature through 2019.
“The government’s proposal to allocate RM50 million to set up a co-investment Fund to invest alongside private investors via equity crowdfunding and P2P (peer-topeer) financing is also a step in the right direction,” it said.
It added that the measures would help boost investors’ participation within the platforms as the presence of government support would help increase liquidity and promote the viability of such platforms.
“Small and medium enterprises stand to gain as well, as they could have wider access to capital for their financing needs,” it said.