KUALA LUMPUR, Jan 21 ― Putrajaya needs to look beyond adjusting its annual deficit figures and focus instead on structural reforms to keep Malaysia’s oil-dependant economy afloat as the plunge in global prices continue to eat into government revenue, economists said.

The observers noted that a number of rating agencies have already given Malaysia’s sovereign ratings negative outlooks, and Prime Minister Datuk Seri Najib Razak’s Budget 2015 revision yesterday have yet to change their views.

Fitch Ratings even warned of a possible downgrade yesterday after Malaysia revised its fiscal deficit target to 3.2 per cent of the gross domestic product (GDP), saying the move is evidence that “dependence on commodities remains a key credit weakness for Malaysia”.

“It is more useful, in my view, to focus on the progress in the underlying structural reforms that underpin long-term fiscal sustainability rather than the year-to-year deficit figures,” said Dr Frederico Gil Sander, a World Bank senior economist who specialises on Malaysia.

Besides warning against a weak implementation of the Goods and Services Tax (GST) this April and a return of oil subsidies, Gil Sander also suggested that Putrajaya prepares budgets for years in advance for its ministries to enhance the credibility of its fiscal policy.

“Part of the deficit is currently due to the financing requirements of government-linked companies (GLCs), which are further crowding out private investment,” suggested Asian Development Bank’s (ADB) lead economist on trade and regional cooperation, Jayant Menon.

“The current looming fiscal crisis in Malaysia provides the perfect opportunity to seriously reduce the government's involvement in the market by divesting from GLCs.”

Yee Farn Phua of Standard & Poor’s (S&P) said the credit ratings agency was more keen on watching long-term fiscal consolidation efforts from the Najib government, rather than just for 2015.

“We view Malaysia’s revised budget as an indication of the government’s continued focus on fiscal consolidation,” the agency’s associate director of sovereign ratings commented.

Najib announced yesterday that Malaysia’s revised fiscal deficit target for 2015 is now 3.2 per cent of the gross domestic product (GDP) instead of 3.0 per cent. Malaysia’s deficit for 2014 was estimated at 3.5 per cent of GDP.

Najib claimed that with the revenue shortfall from the global oil slump, the deficit would be as high as 3.9 per cent of GDP if the budget was not revised.

“We have to accept the reality that we can never achieve the original target of 3 per cent of the GDP as announced previously,” the prime minister admitted in his televised address.

He stressed, however, that Putrajaya was committed to reducing the budget deficit from the targeted 3.5 per cent in 2014.

Despite that, the economists said that yesterday’s budget revision was inevitable, and that Putrajaya must proceed with spending cuts as it still faces a projected revenue shortfall of RM13.8 billion.

The shortfall was calculated based on a forecast that crude oil prices would stay at US$55 (RM197.6) per barrel this year, compared to the initial estimate of US$100 per barrel that was used in the Budget 2015 announced last October.

As a crude oil exporter, Malaysia is highly dependent on petroleum income. Its oil-related revenue totalled RM63 billion in 2013, accounting for 29.5 per cent of total government income.

“There are several reasons why Malaysia cannot defer addressing its large budget deficit.  International rating agencies will almost certainly downgrade Malaysia's credit rating unless it appears to be addressing the deficit.

“Any downgrade will raise the cost of borrowing, as well as put further pressure on the ringgit,” Menon said.

Among the “big three” credit ratings agencies, Malaysia’s sovereign bonds’ outlook was last rated “stable” by S&P and Moody’s, but “negative” by Fitch.

“[We] view that reforms to attract private investments are insufficient and growth is being underpinned by increasing amount of government and household indebtedness,” said HSBC's Asean economist Lim Su Sian.

Prior to Najib’s announcement yesterday, HSBC's credit research team had already placed Malaysia's sovereign on a negative outlook for 2015, according to Lim.

“Fiscal consolidation remains very important for Malaysia's longer-term growth prospects as well as capital flows, and deferring those efforts now particularly at a time of increased global macro and financial market uncertainty would be foolhardy.

“The fact that Najib did not end up making any significant revisions to the 2015 deficit goal this morning suggests that the government is keenly aware that it needs to remain committed to its fiscal consolidation aims, in spite of the challenges,” Lim added.

In the Budget 2015 revision announced yesterday, Putrajaya insisted that there will be no cuts in the RM48.5 billion allocated to development expenditure, preferring instead to reduce operational expenditure by RM5.5 billion.

Putrajaya is also targeting an economy growth between 4.5 and 5.5 per cent this year, down from an earlier forecast of up to 6 per cent.

“Continuing on the path of fiscal consolidation is still the right policy so that Malaysia can continue to rebuild its fiscal buffers,” offered Gil Sander.

“The fact that 2015 will continue the consolidation trend, albeit at a slower pace, is positive.”