KUALA LUMPUR, June 13 — Fiscal measures are a particular area of focus for Malaysia given that the country’s high debt burden acts as a credit constraint, said Moody’s Investors Service.
“Consequently, to what extent the new government achieves fiscal deficit consolidation will be vital in gauging the eventual effects on Malaysia’s fiscal metrics and credit profile,” it said.
Moody’s said this in a report titled “Government of Malaysia: FAQ on credit implications of the new government’s policies”. The report analyses the implications of the new Malaysian government’s (A3 stable) policies on the sovereign’s credit profile.
It said the transition of power, following the 14th General Election last month away from the incumbent party that led the country for more than six decades, has introduced some policy uncertainty.
Moody’s said it would examine any new government’s policies holistically to gauge their impact on the credit profile.
Meanwhile, the rating agency has maintained its estimate of Malaysia’s direct government debt at 50.8 per cent of gross domestic product (GDP) in 2017 and its assessment of contingent liability risks posed by non-financial sector public institutions has also not changed following some statements by the new government.
“However, the new administration’s treatment of large infrastructure projects that may be placed under review but have benefited from government-guaranteed loans in the past, and outstanding debt from state fund, 1Malaysia Development Bhd, will play an important role in determining risks that contingent liabilities pose to the credit profile,” it said.
On the Goods and Services Tax (GST) abolishment, Moody’s said that in the absence of effective compensatory fiscal measures, this development is credit negative because it increases the government’s reliance on oil-related revenue and narrows the tax base.
It estimated that revenue lost from the scrapped tax would measure around 1.1 per cent of GDP this year, even with some offsets, and 1.7 per cent beyond 2018; further straining Malaysia’s fiscal strength.
Moody’s viewed the targeted reintroduction of fuel subsidies as credit negative because subsidies distort market-based pricing mechanisms, and could strain both the fiscal position and the balance of payments while raising the exposure of government revenue to oil price movements, it said.
On growth outlook, the change in government would not materially alter growth trends in the near term, it said.
“The removal of GST could boost private consumption in the short term.
“However, a review of large infrastructure projects could also result in any pick-up in investment being more spread out than Moody’s had previously anticipated,” it added. — Bernama