The govt’s statutory debt limit of 60% of GDP could be raised further to 70% if necessary

by ASILA JALIL / pic by ARIF KARTONO

MORE fiscal support is expected to contain the fallout of the fresh Movement Control Order (MCO) announced by the government yesterday which may require the government to revisit its debt ceiling of GDP which was recently raised to 60% from 55%.

Singapore Institute of International Affairs senior fellow Dr Oh Ei Sun said the government’s statutory debt limit of 60% of GDP could be raised further to 70% if necessary, following the fresh round of movement restrictions.

The MCO enforced on the five states and three Federal Territories will have an adverse impact on the economy as they contribute more than half of the country’s GDP.

“Well, the MCO includes states and territories such as Selangor, Penang and the Federal Territories, which account for more than half the country’s GDP, so it would, of course, put a deep dent to the recovery effort, but it is necessary and unavoidable to curb the pandemic,” he told The Malaysian Reserve yesterday.

He added that the country could still record a rebound in economy beyond 6% if the pandemic curve is suppressed as a result of the MCO and vaccine rollout which is expected to reach Malaysia in February.

“However, the recovery will be more of a K-shaped recovery, as the gap between the rich and poor would be further widened,” he said.

Yesterday, Prime Minister Tan Sri Muhyiddin Yassin announced a fresh 14-day MCO (effective tomorrow till Jan 26) to curb the surge in Covid-19 cases in the country, which he said had put the country’s healthcare system at a “breaking point”.

The five states — namely Selangor, Sabah, Melaka, Johor, Penang and the Federal Territories (Labuan, Putrajaya and Kuala Lumpur) — will be impacted due to the high number of daily infections recorded over the past months.

Meanwhile Pahang, Perak, Negri Sembilan, Kedah, Terengganu and Kelantan will be placed under Conditional MCO, while Perlis and Sarawak will observe Recovery MCO.

Malaysian Rating Corp Bhd (MARC) stated in its recent economic outlook for the year another round of “debt-led” stabilisation policy will take place in 2021 which will likely strain Malaysia’s fiscal position further.

Malaysia’s federal government domestic debt is capped at 55% of GDP under the Loan (Local) Act 1959 and Government Funding Act 1983. To help ease the pandemic’s blow on businesses, Parliament had in August passed the Temporary Measures for Government Financing (Coronavirus Disease 2019) Act 2020 to temporarily increase the statutory debt limit from 55% to 60% of GDP for two years.

“We think given the pandemic’s expected long-term economic scarring and the unprecedented fiscal measures necessary to mitigate the effects, the statutory debt limit could be raised again, possibly to 65%,” it said in the report dated last Friday.

The rating firm added that most forecast on the country’s economic recovery reflected the rebound recorded in the third quarter of 2020 (3Q20) where the economy contracted at a slower pace of 2.7% year-on-year (YoY) compared to a contraction of 17.1% in 2Q20.

The forecasts, however, discount the recent spike in Covid-19 cases.

“Hence, in the event of another round of fiscal support, we foresee the Parliament raising the statutory debt ceiling again and extending the temporary measures further.

“This reflects growing challenges for the government going forward to balance growth and development with fiscal prudence.”

MARC also foresees the Malaysian economy to rebound to 6.4% YoY this year driven by a strong pick up in private consumption and investment at 7.7% and 6.5% respectively.

Recently, the International Monetary Fund had projected for Malaysia’s economy to rebound by 7% this year backed by domestic and external demand although the recovery will be uneven across sectors.

It also noted that inflation is expected to rise around 2% this year as electricity tariff rebates expire followed by an increase in fuel prices and recovery in the domestic demand.

The Ministry of Finance (MoF) had also projected for the country’s GDP to grow between 6.5% and 7.5% this year after a 4.5% contraction in 2020 due to the Covid-19 pandemic.

In its Economic Outlook 2021 report released last year, MoF said the rebound in GDP will be driven by the expected improvement in global growth and international trade.