by JAY SHEILA / Pic by Muhd Amin Naharul
TARGETED subsidy and the reintroduction of the Goods and Services Tax (GST) scrapped in 2018 may see daylight after Malaysia’s next general election, according to a rating agency.
“We think a shift to a more targeted subsidy regime is likely, whatever the election outcome. The next government could also seek to reintroduce the GST, which might improve fiscal consolidation prospects. However, such a move would be politically controversial,” Fitch Ratings Inc said in a statement.
It said the timing of Malaysia’s next elections — due by July 2023 at the latest — remains uncertain, but the country’s recent strong economic performance may facilitate fiscal consolidation following the ballot.
“The likelihood of robust fiscal consolidation over the next parliamentary term could increase if the election delivers a large majority to a government committed to improving public finances,” Fitch said.
Fiscal consolidation describes government policy intended to reduce deficits and the accumulation of debt.
However, the rating agency noted that a confidence and supply agreement with the Opposition that stipulated the government would not seek a dissolution of Parliament before July 31, 2022, has expired, increasing the likelihood of an early election.
It noted that some within Umno, the dominant party within the government, have advocated for an early vote. Malaysia’s strong economic growth of 8.9% year-on-year in the second quarter of 2022 may bolster such calls.
However, Prime Minister Datuk Seri Ismail Sabri Yaakob of Umno appears keen to pass more of his agenda before dissolving Parliament.
The rating agency said that political instability has been reflected by a series of governments since 2018, most with thin majorities.
“However, this has not prevented these governments from implementing policies and budgets, which in turn has partly mitigated the impact of political uncertainty on Malaysia’s creditworthiness. This could reflect the underlying strength of Malaysia’s ministries and institutions.
“Nonetheless, successive changes in government have decreased visibility over the long-term direction of policy and appear to have reduced the scope for fiscal consolidation. Moreover, there is a risk that government’s effectiveness could weaken if political volatility is sustained,” it said.
Fitch said that the next government’s medium-term fiscal strategy will be important from a rating perspective.
When the rating agency affirmed Malaysia’s ratings at ‘BBB+’ with a stable outlook in February 2022, it stated that a reduction in general government debt/GDP, bringing the ratio closer to peer medians, for instance, through implementation of a strong fiscal consolidation strategy, could lead to positive rating action.
“We also said in the rating affirmation that a deterioration in governance standards, for example, indicated by a significantly lower score for the World Bank Governance Indicators, could result in negative rating action,” it said.
On subsidies, it said that subsidies to mitigate the rising cost of living and associated with higher commodity prices could amount to RM71 billion, or around 4.2% of GDP, in 2022. But it expected the overrun on spending to be offset by higher oil revenue, a windfall corporate tax and a recently approved sales tax on imported online goods.
Overall, Fitch said it still expected the federal government deficit this year to be in line with the budget’s forecast, at around 6% of GDP.