KUALA LUMPUR (Oct 25): Economists at Malaysian Rating Corp Bhd (MARC) have projected the country’s budget deficit this year to range between 3.5% and 3.8% of the gross domestic product (GDP), higher than Putrajaya's estimated range of 2.8% to 3%.
A research report led by MARC’s chief economist Nor Zahidi Alias said the spike in budget deficit would only be a one-off event, as the government implements measures to repair its balance sheet, before the deficit narrows to 3.4% of the GDP in 2019.
“The budget deficit target could be adjusted upwards significantly to ease the pressure on growth. This is despite the increasing risk of a greater scrutiny on Malaysia’s sovereign rating outlook by international credit rating agencies.
“The debt problem will be addressed through the firming up of future economic growth plans, rather than through overzealous expenditure cuts. Budget deficit targets could be revised upwards to between 3.5% to 3.8% of GDP for 2018, but will be reduced to 3.4% of GDP in 2019,” the report, which was released today, read.
MARC is projecting Malaysia’s economy to expand by 4.8% this year, and has penciled-in a real GDP forecast of 4.6% for next year.
“The deceleration in private consumption growth to 6% from 6.8% in 2018 and a moderation in exports are underlying factors behind the softer headline GDP growth. Private investment will stabilise slightly, while public investment will show a positive growth on the back of the low base in 2018,” the report said.
MARC noted inflation will remain benign on the back of moderating domestic demand and a weaker external environment.
“The GDP deflator is also flashing a signal of lower overall prices in the economy (second quarter of 2019 [2Q18]: 0.9% versus 2Q17: 4.5%). However, the relatively weak ringgit will to some extent limit the weakness in Consumer Price Index (CPI) numbers. We expect CPI inflation to be in the range of 2% to 2.5% in 2019," it said.
Monetary policy adjustment could lead to a 25 basis points (bps) cut in the overnight policy rate (OPR) in 2019, if real GDP growth starts to skid towards the bottom range of 4%, the ratings firm added.
This is in view of low inflation that results in a still positive real interest rate of 0.5% to 1% in 2019 (2018: 2%).
“The statutory reserve requirement (SRR) could also be adjusted downward, in an effort to enhance the liquidity support of the economy. We foresee a possibility of a 50 bps-100 bps reduction in the SSR, if growth numbers start to look vulnerable from the viewpoint of policy makers,” it said.
Overall, MARC expects lower allocations for Budget 2019 as the government focuses on being lean in its expenditure, as hinted in the government's mid-term review of the 11th Malaysia Plan.
“The proposed allocation for development expenditure in Budget 2019 could be lower than the average of past Budgets (2010-2017: RM50 billion per annum). While this may be so, MARC expects the government to push for higher utilisation of the budgeted allocation in 2019 (2010-2017: 89% utilisation of the budgeted allocations),” it said.
Operating expenditure will also likely be trimmed, with main areas of focus being emoluments, pension and gratuities, as well as debt service charges, which grew faster than the nominal GDP in the past 10 years at 7.3%, 9.6% and 9% per annum, MARC added.