(Repeat for additional subscribers)
Sept 3 (The following statement was released by the rating agency)
Malaysia's measures, announced yesterday, to lower fiscal subsidies and limit
import-intensive investment are a strong statement of the government's intention to stem
pressure on the sovereign credit profile from deteriorating public finances (as reflected in the
Outlook assigned to the 'A-' rating in July 2013).
The measures are consistent with Fitch Ratings' fiscal projections, and are
credit-neutral over the near term. Further steps to improve fiscal
sustainability and long-term macroeconomic stability could see the ratings
revert to Stable Outlook.
The fuel subsidy reduction is a first, small, step ahead of possible additional
measures to shore up public finances. Projected near-term fiscal savings from
the 20 sen/litre hike in the price of subsidised fuel products are MYR1bn in
2013 (0.1% of GDP) and MYR3bn (0.3% of GDP) in 2014. Fitch was already factoring
in a net 1ppt of GDP reduction in government expenditure in its fiscal
projections for the period to 2015, so these measures in themselves do not
significantly alter the agency's analysis.
The timing of yesterday's announcement seems responsive to heightened global
market volatility brought on by impending Fed tapering and greater investor
scrutiny of vulnerabilities in emerging markets. A more calibrated pace of
public investment prioritising non-import-intensive projects should limit the
risk of near-term fiscal overruns as well as lower the likelihood of the current
account slipping into a deficit. We estimate that Malaysia's current account
surplus will fall - sharply - to 3% of GDP this year after averaging 11% over
However, the fundamental driver of the narrowing current account surplus has
been the widening public sector deficit, drawing attention to the health of
medium-term public finances. Effective fiscal consolidation in the next 12
months will by no means be easy. This is for two reasons:
First, the Malaysian economy is undergoing a terms-of-trade shock, with the
prices of key commodity exports falling sharply. In this environment,
expenditure restraint could raise downside risks to our GDP growth forecasts of
around 5%, year-on-year, in 2013-2014. If this were to materialise, slowing
growth could also lower tax receipts, making it that much more difficult to
achieve the medium-term government deficit target of 3% of GDP by 2015.
The second reason is that the political position of the ruling coalition has
weakened following the May election. This means the government is likely to
continue to encounter difficulties in implementing far-reaching, and much
delayed, revenue-enhancing reforms such as the Goods & Services Tax (GST).
The upshot is that the corrective fiscal measures, announced yesterday, are too
small to alter the Negative Outlook on Malaysia's 'A-' sovereign rating.
Sustained reform implementation, if accompanied by structural measures to
broaden the revenue base, could make a difference to the sovereign's credit
profile. But such an intensification of reforms that can also withstand
potential growth headwinds, is not on the cards at present.