Fitch Downgrade A Wake-Up Call For Policymakers
In what we view as a wake-up call for Malaysian policymakers, Fitch Ratings downgraded its credit outlook for Malaysia from stable to negative on July 31, citing the lack of progress on budgetary reforms to address the country's deteriorating fiscal position. The latest downgrade by Fitch vindicates our long-held view that failure by the Malaysian government to speed up fiscal reforms would undermine the country's credit ratings ( see 'Election Budget Points To Widening Deficit', September 18 2012). In response to the downgrade, Prime Minister Najib Razak, who is also the finance minister, said that his administration will unveil measures to strengthen the fiscal position and bolster growth in the 2014 budget to be announced in October.
Latest figures published by Bank Negara Malaysia (BNM) showed that the budget deficit has increased from MYR4.5bn in Q412 to MYR6.1bn in Q113. This is closely in line with our forecasts for Malaysia's fiscal deficit to rise from 4.5% in 2012 to 4.9% in 2013 (due to proposed increases in welfare spending for the 2013 budget) before we begin to see a gradual narrowing of the deficit towards 4.3% and 3.6% in 2014 and 2015. Our forecasts therefore suggest that the government is very likely to miss its fiscal targets. Looking ahead, we view the introduction of a GST bill as a crucial element if the government wishes to implement any meaningful budgetary reforms. We caution that any attempts by the government to side-line the GST bill in the next budget are unlikely to sit well with investors.
Foreign Capital Outflows A Major Threat
|Not An Easy Balancing Act|
|Malaysia - Fiscal Balance, MYRmn (LHS) & % of GDP (RHS)|