Malaysia risks credit downgrade if reforms not done, says S&P

ARCHIVES 2012

By admin-s On Sep 6, 2012

File photo of people shopping in Putrajaya. S&P has said the government should look at introducing a goods and services tax and cutting subsidies. — Reuters pic

(The Malaysian Insider) – Malaysia’s sovereign credit rating may be cut if the government does not deliver promised reforms to cut spending to reduce its fiscal deficits, Standard and Poor’s (S&P) has said in its latest report on the country, joining other global ratings agencies in warnings about the strains on the country’s credit profile.

S&P said reforms the government should look at include the introduction of a goods and services tax (GST) and subsidy cuts.

“We may raise the sovereign credit ratings if stronger growth and the government’s effort to reduce spending result in lower-than-expected deficits, as indicated in the 10th Malaysia Plan. With lower deficits, a significant reduction in government debt is possible.

“We may lower the ratings if the government can’t deliver the reform measures to reduce its fiscal deficits and increase the country’s growth prospects. These reforms may include, but are not limited to, the GST and subsidy reforms on the fiscal side, and private investment and economic diversification reforms on the economic growth agenda,” said the ratings agency.

Last month Fitch Ratings said in a separate report that Malaysia had yet to present a convincing plan to tackle the twin fiscal threats of its federal budget deficit and federal debt.

Fitch also said that data clearly showed public sector-linked activity had been a key driver of GDP growth for the last four quarters alongside robust private sector activity.

It said that the ratio of federal government debt to GDP reached 51.8 per cent at end-2011 despite strong GDP growth but barring a further deterioration in the global economy, the Malaysian government should be able to meet its 2012 deficit target of 4.7 per cent of GDP.

Fitch added that improving the nation’s fiscal position would be challenging without significant reform to address the cost of fuel subsidies, broaden the fiscal revenue base, or reduce dependence on energy-linked revenues.

S&P’s latest Malaysia report appeared to echo some of those views.

The country’s moderately weak fiscal and government debt profile for the rating category constrains the sovereign rating, it said.

Putrajaya had made some moves towards cutting subsidies last year, but political pressure in the run-up to elections have relegated some of these reforms to the back of the line.

Plans to introduce GST have also been shelved because of fears that it would cost votes for the ruling Barisan Nasional (BN) government.

S&P said it believed Malaysia’s slow fiscal consolidation stems from high subsidies and the relatively weak revenue structure.

“Malaysia depends largely on petroleum-related revenues. The government has been planning to reform the subsidy system and introduce a goods and services tax.

“However, given the political sensitivities, we expect significant implementation, if any, would only be after the general election,” it said.

The agency added that for more than a decade, Malaysia’s economic growth was partially brought about by large public investments — sometimes exceeding that of the private sector — and this had adversely affected the government’s fiscal position.