Fitch Solutions foresees little room for public spending even after govt raises debt ceiling

Malaysia’s debt load is currently at 59 per cent of its and is among the highest in South-east Asia. According to Fitch Solutions, it is unlikely for the Perikatan Nasional (PN) administration to raise the ceiling higher, beyond 60 per cent. — Picture by Hari Anggara
Malaysia’s debt load is currently at 59 per cent of its and is among the highest in South-east Asia. According to Fitch Solutions, it is unlikely for the Perikatan Nasional (PN) administration to raise the ceiling higher, beyond 60 per cent. — Picture by Hari Anggara

KUALA LUMPUR, Aug 31 — Putrajaya will have limited room to spend despite lifting the country’s debt ceiling from 55 per cent to 60 per cent, market research firm Fitch Solutions said.

In a report published last week, the affiliate of ratings agency Fitch said the stimulus aimed to counter the economic fallout of the Covid-19 pandemic will likely push Malaysia’s borrowing load into the red zone.

Malaysia’s debt load is currently at 59 per cent of its and is among the highest in South-east Asia. According to Fitch Solutions, it is unlikely for the Perikatan Nasional (PN) administration to raise the ceiling higher, beyond 60 per cent.

“The fiscal stimulus enacted to counter the economic disruptions caused by the Covid-19 pandemic and the lockdown measures imposed to contain its spread has left government debt practically at even the raised debt limit of 60 per cent of GDP,” the company said.

Finance Minister Tengku Zafrul Abdul Aziz said last week Malaysia’s debt-to-GDP ratio is expected to hit 58.4 per cent once Putrajaya’s RM45 billion stimulus plans take effect.

But he also said policymakers will still have fiscal space to implement countercyclical measures if necessary.

Fitch Solutions said interest payments are likely to remain a relatively small part of the government’s expenditure.

It added that the government is also unlikely to begin the process of paying it in earnest starting next year.

Still, the market research firm said heavy borrowing and stagnant revenue will keep fiscal space tight for at least two years for the government to keep public spending below the revised debt limit.

It said the debt load could shake investors’ confidence and put pressure on government-issued securities, although Fitch Solutions also see likely intervention from Bank Negara Malaysia to relieve some of the squeeze.

“We further expect the central bank to act to relieve any pressure in the bond markets resulting from increased government borrowing, as it appears to have done in April,” the firm said.

The country’s fiscal balance in 2020 will likely remain at -6.1 per cent of GDP due to the heavy pressures put on revenues due to Covid-19’s impact on the economy and the government’s foregoing of revenues as part of its fiscal stimulus package, according to Fitch Solution’s forecast.

“Meanwhile, the same stimulus package also means expenditures are unlikely to fall as much as revenue, resulting in what is likely to be the largest fiscal deficit since 1987,” it added.

Malaysia’s expenditure growth remained firmly in the double digits at 13.1 per cent year-on-year while revenue growth has practically stagnated at 1.6 per cent within the same period.

The economy contracted by 17.1 per cent in real GDP terms in the second quarter.

Parliament passed on August 25 legislation to raise the government debt limit to 60 per cent of GDP, from 55 per cent of GDP previously.

The law expires in 2022, at which point the limit is set to revert to 55 per cent in the absence of an extension.

Malaysia is now among countries with the highest debt limits in emerging Asia, along with Thailand which also has a 60 per cent government debt ceiling.

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