KUALA LUMPUR (Nov 5): Malaysia is at a "relatively high risk of fiscal slippage given its narrower revenue base" as outlined in Budget 2019, according to Nomura Global Markets Research.

The government now relies more heavily on oil-related revenues, as well as ambitious direct tax targets that are likely to disappoint as a result of a slowing economy, the research house said in a note today.

"We therefore revise up our fiscal deficit forecasts to 3.9% of gross domestic product in 2018 and 3.7% in 2019, and remain concerned about possible negative ratings action," Nomura said.

This represents a larger fiscal deficit target than that set by the government of 3.7% this year, and 3.4% in 2019.

While the government has signalled its commitment to fiscal consolidation by aiming to bring down the fiscal deficit to 3% of GDP by 2020 and 2.8% in 2021, Nomura said the fiscal risks in the next two years make it less optimistic that these targets will be achievable.

"As such, we think the ratings agencies will likewise take a cautious approach in assessing medium-term sovereign creditworthiness and this will clearly hinge on the implementation of Budget 2019.

"Against this backdrop, a worrying scenario for us is a vicious cycle where fiscal concerns lead to a persistent sell-off in the local bond market which puts the currency under significant pressure and leads to more disruptive capital outflows," Nomura said.

It added that Malaysia is already one of the most vulnerable emerging markets in a risk-off environment, given the heavy foreign positioning in government bonds. "...these foreign holdings are likely to be highly sensitive to fiscal slippage and/or negative ratings actions," it said.

While there are some upside risks to inflation next year, which it said will be partly due to some helpful fiscal measures like a return to more market-based fuel pricing and higher excise on sweetened drinks, it sees "limited implications for monetary policy" and still expects policy rates to remain unchanged through 2019.

Nomura reduced its end-year target for the FBM KLCI to 1,770 points from 1,830 points previously, as it removed Genting Malaysia Bhd as a top stock pick on the back of significant hike in gaming duties.