KUALA LUMPUR (Nov 8): Fitch Ratings has cautioned risks to Malaysia’s fiscal outlook has been raised by larger deficit targets announced in Budget 2019, because the pace of decline in debt ratios would be slower.

In a statement today, the agency said it had expected the 2018 target to be met when it affirmed the sovereign rating at 'A-' with a “Stable Outlook” in August.

Although the government’s pledges to raise governance standards and address corruption with respect to public finances could eventually support Malaysia's sovereign credit profile which is currently below the 'A' category median, the benefits “will take time to materialise”.

“At that time, the government had expected that the net revenue loss from its repeal of the GST and higher spending from fuel subsidies would be offset by higher oil receipts and expenditure cutbacks.

“However, expenditure in the new budget is now higher than anticipated, because of tax refunds and more significantly, the inclusion of one-off expenditure items being brought on-budget, in part to enhance transparency,” Fitch said.

Other than the sharp rise in the 2019 revenue to gross domestic product (GDP) ratio that reflects a special Petronas dividend, Fitch said substantial measures to raise non-oil revenue will be required for the government to meet its medium-term targets, if oil prices do not remain elevated.

“Our own assumption is that oil prices will fall from US$70 per barrel in 2018 to US$65 per barrel, which is below the authorities' projections.

“Additional revenue measures have been announced that could yield gains — such as higher property taxes and an increase in stamp duty — but there could be implementation challenges. Expenditure overruns are also a risk, given the government's emphasis on populist measures to sustain growth and ensure socio-economic well-being.”

On the government’s sales of non-strategic public assets, the agency warned of risks to debt containment from contingent liabilities related to public-private partnerships, estimated at more than 10% of GDP.

This may migrate to the sovereign balance sheet, as the government continues to increase the transparency of public finances.

Furthermore, it said Malaysia's public debt is already high and that further increases over the medium term could have negative rating implications.

“We raised our estimate of end-2017 central government debt to 65.5% of GDP, from 50.8%, at the last review, to reflect the government's recognition that it will need to service a large share of explicitly-guaranteed debt. The median public debt ratio for 'A' rated sovereigns is 50.6%,” Fitch explained.

Provided GDP growth remains broadly in line with the authorities' revised outlook of 4.9% for 2019 and 5% in 2020, Fitch said it expects debt ratios to fall within the next few years.