Thursday 28 Mar 2024
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This article first appeared in The Edge Financial Daily on October 26, 2018

KUALA LUMPUR: Malaysian Rating Corp Bhd’s (MARC) economists 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% and 3.8% of GDP for 2018, but will be reduced to 3.4% of GDP in 2019,” according to the report released yesterday.

MARC is projecting Malaysia’s economy to expand by 4.8% this year, and expecting 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 the 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,” it said.

MARC noted that inflation will remain benign on the back of moderating domestic demand and a weaker external environment.

 The rating firm added that monetary policy adjustments could lead to a 25-basis-point (bps) cut in the overnight policy rate in 2019, if real GDP growth starts to skid towards the bottom range of 4%.

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 SRR if growth numbers start to look vulnerable from the viewpoint of policymakers,” it added.

Overall, MARC expects lower allocations for Budget 2019 as the government focuses on being lean in its expenditure as hinted in the government’s midterm review of the 11th Malaysia Plan.

 Operating expenditure will also likely to be trimmed, with main areas of focus being emoluments, pension and gratuities as well as debt service charges.

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