Thursday 28 Mar 2024
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KUALA LUMPUR (May 22): Based on a national scale, the government transition following the results of the 14th general election (GE14) has no sovereign credit rating impact with the government of Malaysia rated AAA as it has the lowest relative credit risk in the country, according to the Malaysian Rating Corp Bhd (MARC).

MARC chief economist Nor Zahidi Alias said the rating agency maintained its real gross domestic product (GDP) growth forecast for 2018 at 5.3%, supported by a favourable external environment.

"MARC does not expect any significant shift in the country's long-term macro policy direction as economic growth will remain resilient on the back of economic policies that are generally proactive and practical, supported by strong macroeconomic and prudential policy frameworks," he wrote in a report released today titled Post-GST Removal: Risk Prospects Ahead.

"A commendable export sector performance would in turn act to support domestic demand. MARC foresees real export growth to be 6% in 2018," Zahidi added.

On the domestic side of the equation, however, MARC foresees total investment's contribution to headline growth will decline in 2018 in view of the possible moderation in the pace of mega projects due to the new government's reprioritising of projects.

Zahidi is concerned about Malaysia's future fiscal landscape especially with the absence of the goods and services tax (GST) revenue, which accounted for roughly 20% of total federal government revenue in 2017.

While the removal of the GST may uplift consumer sentiment in the short term, Zahidi expects the impact will be neutral on private consumption as the actual consumer spending trend would depend on the impact of GST removal on general prices.

"We foresee 'price stickiness' to be a major challenge for policy makers as businesses may, for example, be reluctant to reduce prices due to profiteering and a general belief that most businesses will not reduce prices.

"As such, alternative mechanisms may be needed to handle the issue of 'price stickiness' post-GST removal, if a decrease in prices is the objective of the authorities," he said.

The fact remains that the main concern from a sovereign rating perspective is none other than the shortfall in federal government revenue after the abolition of the GST.

"MARC is of the opinion that the gap between the amount of SST to be collected in the near future and the abolished GST would not be as large as generally expected due to the larger number of taxpayers after the latter was introduced in 2015," Zahidi said.

However, he said this may be mitigated by the new government's short-term measures such as reducing leakages and reprioritising projects when utilising its operating expenditure. The expected higher commodity prices, particularly from oil and oil-related products, would also provide extra revenue to government coffers, he said.

For this, MARC estimates that Malaysia's budget deficit for 2018 would remain unchanged from last year's level at 3% of GDP. Over the medium-to-long term, however, Zahidi is somewhat optimistic for new types of revenue sources that are available to replace the fiscal shortfall due to the removal of the GST.

"Longer term initiatives will be needed to keep medium-term fiscal consolidation efforts on track. This would mean new initiatives to generate alternative revenue sources in the years ahead," Zahidi said.

"We are of the view that greater clarity with regard to policy measures that affect both revenue and expenditure is needed to fully assess the impact of GST removal on Malaysia's fiscal performance in the next few years. From a sovereign rating perspective, the government's fiscal vision in the medium term is critical in determining its prospects going forward," he added.

Besides that, Zahidi highlighted Malaysia's debt level as another sovereign credit rating constraint.

"While the federal government debt-to-GDP ratio has moderated recently, debt in absolute terms has risen over the years," he said.

Zahid noted that government debt had risen by 7.8% on a compound annual growth rate (CAGR) basis over the 2010-2017 period while debt directly guaranteed by the government has climbed by 13.7% over the same period.

Nevertheless, he added that the new government's pledge to improve governance and keep the business environment friendly will also be positive from a sovereign rating perspective going forward.

 

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