After ratings caution, Putrajaya urged to reach across aisle for reforms

KUALA LUMPUR, Aug 9 — The Barisan Nasional (BN) government cannot afford to leave the opposition Pakatan Rakyat (PR) out of its fiscal reform efforts now that ratings firm Fitch Ratings has set the clock running on the country’s economy, political analysts and economists have warned.

Wan Saiful Wan Jan, the founder of the Institute for Democracy and Economic Affairs (IDEAS), said while Putrajaya may well be aware of what was needed to haul Malaysia back up on its feet, it may be stalling on painful policies such as the proposed good and services tax (GST) over fears of a political fallout.

“The government needs to stoop down a bit and not pretend they know everything and admit they need the support from Pakatan Rakyat... to support the reform initiatives the government needs to do,” Wan Saiful said.

“There is the need to diversify sources of income in the country.”

And that is just the beginning.

“There are other reforms needed to be done as well, to reduce deficit and reduce the national debt,” the chief executive of the political and economic think-tank told The Malay Mail Online.

Last Wednesday, Fitch cut its outlook on Malaysia’s sovereign debt to “Negative”, citing gloomier prospects for reforms to tackle the country’s rising debt burden following a divisive election result this year.

The revision from a stable outlook adds to concerns over Malaysia’s high debt pile at a time when the currency has been pressured by bond fund outflows and talk of the US Federal Reserve ending its easy monetary policy.

But despite the alarming tone of the outlook downgrade, Suhaimi Ilias, group chief economist at Maybank Investment, told The Malay Mail Online that Malaysia still has the customary two years before ratings firms follow through on their warning.

“I think [the downgrade] was to highlight a concern of the political will to deal with the issue of deficit with government debt, probably in relation to the suspension of the subsidy rationalisation programme in the middle of 2011 due to obvious reasons,” he said in a phone interview, referring to the 13th general election.

In its downgrade, Fitch had singled out the lack of political fortitude to see through necessary reforms.

“Prospects for budgetary reform and fiscal consolidation to address weaknesses in the public finances have worsened since the government’s weak showing in the May 2013 general elections,” Fitch said in a statement.

CIMB’s chief economist Lee Heng Guie said Putrajaya now needs to send a strong message with Budget 2014 to dispel doubts about its intention to keep the economy on track.

“Much has been said about the need for fiscal reform but the lack of strong political will to press ahead with bold reforms could undermine the country’s fiscal and debt positions,” Lee told The Malay Mail Online via e-mail.

Lee warned that failure to deliver the necessary reforms to assuage outside observers such as Fitch may carry severe repercussions.

“This raises the risk that Malaysia’s sovereign credit rating may be cut if the government does not deliver the promised reforms to reduce its fiscal deficits.

“We think the setting up of a Fiscal Policy Committee would expedite the fiscal reforms,” Lee said.

Similarly, Suhaimi said the Budget 2014 Prime Minister Datuk Seri Najib Razak is due to present on October 25 will be key.

“We’ll see whether the government will put the fiscal reform agenda back on track again.

“[Hopefully] government will become more disciplined in terms of spending. Over the past few years it has been a regular situation with the government asking a big increase in the budget through the supplementary budget Bill which does not correlate with discipline budgeting and spending,” he said.

The Fitch outlook downgrade appeared as other warning signs began surfacing over Malaysia’s slowing economy: slowing export growth, a falling trade surplus, and a ringgit at a three-year low against the US dollar.

It presents a dilemma for Najib who must now address soaring national debt — currently at 53 per cent of GDP, just under the 55 per cent ceiling — while needing to keep the economic engine room churning to avoid sending the country into a recession.