KUALA LUMPUR (June 1): Maintaining Malaysia's fiscal deficit at the budgeted 2.8% of gross domestic product (GDP) will be 'hard', instead Deutsche Bank sees the gap widening to 3.1% this year, said the bank today in a macroeconomics report.

Nevertheless, it said the deficit is not high enough to trigger a downgrade.

The bank said the hit from the shift from goods and services tax (GST) to sales and services tax (SST) will be higher at 1.4% of GDP than the 1.2% predicted by the government, due to changes in consumption patterns.

"The government expects to fill a part of this gap through higher oil revenues and dividend payments, amounting to 0.7% (RM10.4 billion), which we think is credible, assuming Brent remains above the government's US$70 per barrel assumption," it said.

On the expenditure side, Deutsche Bank said development spending is slated to be the hardest hit, with overall project implementation cuts amounting to 0.7% of GDP or RM10 billion.

"However, this may not be enough as we believe the fuel subsidy allocation of RM3 billion (0.2% of GDP) is likely to fall short; our estimate is 0.5% of GDP for the announced policy mix and current prices.

"Having said that, our growth estimate of 5.6% is higher than the government's 5.3%, which should help cover some of this shortfall," it said.

Overall, the bank believes that maintaining the fiscal deficit at the budgeted 2.8% of GDP will be hard and it expects a widening of the deficit to 3.1% (0.2% for SST + 0.3% for subsidies - 0.2% for growth vs. government estimates).

"We do not expect this level of deficit to trigger a full ratings downgrade," it added.

Yesterday, Finance Minister Lim Guan Eng had said the fiscal deficit is expected to be maintained at 2.8% as targeted by the Barisan Nasional government previously.

The minister had announced that the federal government revenue would fall by a net RM17 billion with the abolishment of GST and implementation of SST. The short fall is expected to be partly plugged in the immediate term through mitigating measures focused on the review of expenditure, including the downsizing, delaying and abolition of overlapping and non-urgent programmes and projects.

These are expected to save the government RM10 billion, Lim said.

As for growth, Deutsche Bank has maintained its growth forecasts of 5.6% for 2018 and 4.9% for 2019, stating that the 'tax holiday' and subsidies are likely to benefit private consumption, partly offsetting weaker public spending.

Taking fuel subsidies and zero-rated GST into account, it revised downward its inflation forecast from 2.5% to 1.9% for 2018 and from 3.1% to 2.8% for 2019. Hence, it has ruled out any further rate hikes by Bank Negara Malaysia in 2018, forecasting it to happen only in the first half of 2019 — the last in this cycle.