Malaysia - Fitch sees Malaysia’s fiscal outlook under pressure

PETALING JAYA: Malaysia’s sovereign credit profile will come under increasing strains with room for spending reduced should no comprehensive plans to reduce government debt be rolled out.

Fitch Ratings said in a Monday press release that Malaysia’s public finances may see sustained pressure due to the strong contribution of public-sector spending and investment to economic growth while the country’s reliance on exports exposed it to possible external growth shocks.

The rating agency had reaffirmed the country’s long-term foreign and local currency issuer default ratings at A- and A respectively with a “stable outlook” on Aug 1.

It said the strains on the credit profile were increasing while the government debt ceiling, which was increased to 55% from 45% of gross domestic product (GDP) in July 2009 to accommodate fiscal stimulus suggests that the room for fiscal slippage might be limited without further alteration to the debt ceiling.

“If this were to happen, it would apply additional negative pressure on Malaysia’s credit profile,” it said, adding that fiscal space for further counter-cyclical stimulus at the current A- rating level appears limited in light of the continued deterioration in public debt ratios as well as the current strength of public sector economic activity.

It said the country’s public finances already compare poorly with both A and BBB range medians with the ration of government debt to GDP reaching 51.8% at end-2011 despite strong economic growth following the fiscal stimulus of 2009 to 2010.

“Looking beyond this year, however, the Malaysian authorities have yet to outline a credible near-term plan to reduce the fiscal deficit to 3% of GDP, and the debt/GDP ratio to 50% by 2015, in line with their official targets. This will be challenging without significant fiscal reform to address the cost of fuel subsidies, broaden the fiscal revenue base, or reduce dependence on energy-linked revenues,” it said.

It said that without such reforms, the base case for the debt-to-GDP ratio would continue to rise until 2016 although these concerns were countered by such strengths as macroeconomic stability, a strong net external credit position and funding flexibility.

“Resilient domestic demand, aided by supportive monetary policy settings, can cushion the Malaysian economy from the current global economic weakness. Barring further deterioration in the global economy, the Malaysian government should be able to meet its 2012 deficit target of 4.7% of GDP, continuing the deficit reduction that began in 2009,” it added.

http://biz.thestar.com.my/

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