The govt’s focus on supporting growth and incomes of poorer households is a factor behind a slower fiscal consolidation path

by MARK RAO / pic by HUSSEIN SHAHARUDDIN

The abolishment of the Goods and Services Tax may risk Malaysia’s fiscal strength, but its creditworthiness is expected to remain stable this year, according to Moody’s Investors Service Inc.

The rating agency said fiscal challenges have increased notably in Malaysia after the government opted for the narrower Sales and Services Tax (SST), which is to shrink the country’s tax base.

“In general, the government’s focus on supporting growth and incomes of poorer households is a factor behind a slower fiscal consolidation path than previously projected,” it said in its report yesterday.

“We expect that the administration will still pursue fiscal consolidation from wider deficit levels.”

Malaysia’s fiscal strength will weaken if the government prioritises growth and provisions to low-income households further, the rating agency cautioned.

For Asia Pacific as a whole, the rating agency said the outlook for sovereign creditworthiness in 2019 remains stable owing to fundamental credit conditions, which will drive sovereign credit over the next 12 to 18 months. This includes Malaysia which is rated A3 ‘Stable’.

“Solid domestic fundamentals, including rising incomes and competitiveness, generally ample foreign- exchange reserves and often sizeable domestic savings, will continue to underpin government credit quality,” it said.

However, growth in the region is slowing while further downside risks have intensified, the agency said.

“Risks stem from tensions between the US (Aaa ‘Stable’) and China (A1 ‘Stable’), tightening global financing conditions, and shifting political and policy priorities domestically.”

In view of prospective trade and investment barriers from the US-China trade rift, Moody’s expects the pace of economic expansion in Asia Pacific to soften this year and next with emerging and frontier markets to experience the sharpest deceleration.

“We forecast median GDP growth rates of 5.5% and 5.2% in 2019 for Asia-Pacific emerging and frontier market economies respectively, while growth in the advanced economies will likely slow to 2.5%,” the rating agency said.

It noted that monetary policy and domestic fundamentals in the region remain supportive for the respective economies.

“Generally, benign prospects for inflation will nevertheless allow monetary policy to remain accommodative in the advanced economies,” it said.

“Longer term, rising incomes and a growing middle class, expanding working-age populations and infrastructure investment enhancing
economic competitiveness will underscore output in the region’s emerging and frontier markets.”

Nonetheless, an escalation of trade tensions between the world’s two largest economies would significantly curtail China’s export growth at the expense of trade-oriented and supply chain economies.

While Hong Kong is especially vulnerable, Malaysia, Singapore, Japan, Korea, Taiwan and Vietnam are also exposed in this scenario due to the integration of their economies into the electronics supply chain through China, Moody’s said.

“Our baseline forecasts assume some limited negative impact on investment in these economies, commensurate with direct trade effects and in light of the decline in import intensity of Chinese electronic exports over the past two decades,” it said.

“A downside scenario involving the broad reevaluation of production and investment across the region’s production chain would have a large, longer-term impact on these economies.”

The rating agency said China accounts for approximately 90% of total services exports which primarily comprise financial and trade-related services — demand of which would decline on lower trade flows.