Fitch unit sees Malaysia’s fiscal deficit widening to 7.4pc as Covid-19 hits revenue

KUALA LUMPUR, Sept 29 — Fitch Solutions Country Risk and Industry Research has revised its 2021 fiscal deficit forecast for Malaysia to 7.4 per cent of gross domestic product from 6.4 per cent previously, largely on the back of decreased revenue and increased stimulus spending.

The Malaysian government is set to raise the statutory debt limit likely before the year ends in a bid to increase spending and mitigate the impact of prolonged lockdowns, with the Cabinet proposing an increase to 65 per cent of GDP from 60 per cent, the Fitch unit noted.

Putrajaya already took on significant debt to roll out RM205 billion in stimulus since the beginning of 2021 in order to cope with the curbs.

Fitch Solutions said the deficit forecast revision took into account the unexpected length of the most recent rounds of the movement control order.

“Depressed revenues due to the lockdown remain the key reason for our revision,” it said in a statement.

Revenue contracted by 6.8 per cent year-on-year and 4.4 per cent y-o-y in the first quarter and second quarters of 2021, respectively. In 2020, the Fitch unit revised its outlook for revenue growth of -3.0 per cent in 2021, from 1 per cent previously.

“We note that this poor result is despite the fact that Brent oil price has been on a general uptrend since January. Indeed, Brent crude oil prices have risen from US$46.75/bbl at the beginning of 2021 to US$80.26/bbl as of September 28,” it said.

“We attribute the revenue weakness to the economy being subjected to some form of lockdown since January 2021, which has severely affected economic activity, especially in the retail and services sector.”

The newly-installed government led by Prime Minister Datuk Seri Ismail Sabri Yaakob is adamant on reopening the economy and sectors badly hit by the movement curbs under a National Recovery Plan that primarily relies on ramping up the vaccination rate.

Fitch Solutions said it expects Putrajaya to tighten its purse for the remainder of 2021 and 2022 is likely to see a marked decrease in government spending as the new administration appears determined to reopen the economy and treat Covid-19 as endemic.

It retained the 2021 average exchange rate forecast at RM4.15/US$, but revised its 2022 average forecast to RM4.20/US$ from RM4.10/US$ previously.

Fitch Solutions said the current third wave of Covid-19 infections remains severe and expects fiscal loosening to continue to support the economy in light of the outbreak, the two main factors causing the weak short-term outlook for the ringgit.

“In our view, the ringgit continues to face depreciatory pressures over the rest of 2021 from the economic impact of the ongoing third wave of Covid-19 infections,” it said.

The ringgit has weakened further since the last update in June 2021, slipping by 0.3 per cent against the dollar to trade at RM4.18/US$ as of September 24, from RM4.16/US$ on June 23, bringing the year-to-date average to RM4.13/US$.

It maintained a forecast for the ringgit to average RMR4.15/US$ for the remaining months of the year.