Published on 05 Nov 2019.
RAM Ratings projects Malaysia’s fiscal deficit to come in at 3.3% of GDP in 2020, marginally wider than Budget 2020’s estimate of 3.2%. Our budgetary projection differs from the Government’s mainly due to our less optimistic GDP growth estimate and lower assumed oil price. The Government’s fiscal stance in 2020 is appropriate given the increasing growth headwinds, and remains in line with its overarching long-term objective of fiscal consolidation.
Fiscal revenue is expected to underperform the budgeted amount by some RM2.6 bil in 2020 (or 0.2% of GDP), falling to RM240.3 bil due to weaker tax revenue and oil-and-gas (O&G)-related earnings. Additional corporate tax incentives under Budget 2020 may also affect tax revenue growth, especially if economic multiplier effects do not materialise. Nevertheless, the long-term outlook on revenue is favourable due to the recent revenue measures in 2019, the introduction of a new income tax bracket for the highest earners, and the Digital Service Tax. These are steps in the right direction towards diversifying Malaysia’s revenue base from O&G-related earnings, which are projected to account for a fifth of overall revenue in 2020. Moreover, these new revenue measures are complemented by ongoing enhancements to Malaysia’s tax administration.
RAM expects operating expenditure (excluding tax refunds) to rise at a more subdued pace of 3.2% to RM237.9 bil next year (Budget 2020: 7.0%). The discrepancy between our projection and Budget 2020’s chiefly reflects the revenue constraints that will result in possible reductions in discretionary spending on supplies and services. Although Malaysia’s transition to a targeted fuel price subsidy programme - from broad-based subsidies – will generate some fiscal savings, initial teething issues are expected to limit these benefits next year. Nevertheless, the Government’s targeted emoluments growth of 0.7% next year will be a challenge to achieve as potential bonuses for civil servants have not been factored into the estimates under Budget 2020.
Development expenditure is projected to come up to RM55 bil, argely in line with Budget 2020’s estimate of RM56 bil. The deviation is not significant as the existing budgetary rules, which cap the Government’s debt burden and debt service charges, will limit excessive borrowings for development projects. That said, a portion of the development expenditure has been allocated to the rationalisation of Government agencies (RAM estimate: RM3.1 bil) and the debt-servicing charges of various strategic entities. The diversion of these funds for such purposes will reduce available on-balance-sheet development expenditure on new public projects.
Effective government debt, defined as on-balance-sheet debt and those the Government is committed to servicing, is projected to be elevated to 68.7% of GDP by end-2019 (end-2018: 65.7%). This is envisaged to rise in the medium term given the resumption of previously suspended big-scale capital projects and the Government’s intention of acquiring some strategic assets. The rising debt level is a concern as fiscal space is constrained, with debt-servicing cost estimated to come up to 14.6% of revenue in 2020. Lumpy committed debt maturities in 2022 and 2023 (RM54.6 bil)in aggregate are also a concern as we do not expect the present trend of revenue growth to significantly reduce this risk in the interim.
In the long run, Malaysia’ fiscal position is anticipated to achieve structural improvements through ongoing efforts to enhance its revenue, via achieving the goals set out by the Tax Reform Committee, and by enacting legislation under the Government Procurement Act 2020 and Fiscal Responsibility Act 2021. While details are currently limited, RAM expects better fiscal oversight and budgetary caps to elevate Malaysia’s fiscal sustainability.
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