Friday 29 Mar 2024
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KUALA LUMPUR: The market showed some reservations towards the government’s revisions to Budget 2015 yesterday, with the ringgit continuing its decline to touch a six-year low of 3.61 against the US dollar and the FBM KLCI hitting an intra-day low of 1,745.64 in the mid-morning session before easing to close at 1,750.11 points, down 3.2 points.

This was followed by Fitch Ratings announcement that it is “more likely than not” to downgrade Malaysia’s sovereign rating in its upcoming review sometime in the first half of the year, on the back of the country’s negative economic outlook.

In a statement yesterday, the credit ratings agency’s associate director Sagarika Chandra said the government’s revision of its fiscal deficit target from 3% to 3.2% of the gross domestic product (GDP) and the reduction of GDP growth forecast for 2015 to 4.5% to 5.5% from 5% to 6%, was a “reinforcement of the fact that dependence on commodities remains a key credit weakness for Malaysia”.

The revisions showed that the credit profile of the nation remains vulnerable to sharp movements in commodity prices, said Sagarika.

“While the prime minister has stated that fiscal reform and consolidation will continue, the upward revision of the fiscal deficit target, on account of the high share of revenues linked to petroleum, which remains a structural weakness, highlights that further measures might be required to meet the fiscal consolidation target of achieving a balanced budget by 2020,” he said.

These factors, he said, are reflected in its “negative” outlook on the rating of the country.

“The negative outlook indicates that Fitch is more likely than not to downgrade the sovereign rating,” he added.

United Overseas Bank Ltd (UOB) regional economist Ho Woei Chen observed that the ringgit’s continued decline yesterday suggested that the market appeared “sceptical” about the new fiscal deficit target of 3.2%.

Ho noted that the ringgit had declined to a six-year low of RM3.61 against the US dollar following the announcement of the revised budget 2015 by Prime Minister Datuk Seri Najib Razak at noon.

“The revised budget shows the government’s commitment towards fiscal consolidation efforts. Nonetheless, it remains to be seen whether the expected revenue improvement can be achieved amid a weaker operating environment and market uncertainties,” said Ho.

She reduced her growth forecast to 4.7% from 5.2% previously, adding that the current account surplus is expected to narrow to 2% to 3% of gross national income from an estimated 5.1% last year.

Credit rating agency Standard & Poor’s also weighed in on the revised budget, saying a prolonged slump in oil prices could derail Malaysia’s fiscal consolidation plan and put at risk the government’s revised economic growth forecast of 4.5% to 5.5%.

“The risks are that the contracting oil and gas sector could affect activities in other sectors to bring down overall economic growth,” said S&P sovereign ratings associate director Yee Farn Phua.

JPMorgan Chase Bank chief economist for Asean Sin Beng Ong was surprised that there was no reference to the government’s off-balance sheet fiscal liabilities in the budget revision.

“There was no reference to the off-balance sheet fiscal liabilities which have been on the minds of investors, especially following concerns around 1Malaysia Development Bhd (1MDB),” said Ong in a note.

Another surprise, said Ong, was that the fiscal development expenditure would not be trimmed and that the current investment programmes relating to Petroliam Nasional Bhd’s (Petronas) Rapid project would also not be delayed despite the drop in energy prices which could impact oil and gas-related cash flows.

“The implication here is that the [country’s] current account position will not improve much,” he said.

BNP Paribas Investment Partners Malaysian Sdn Bhd head of Asean equities Patrick Chang told The Edge Financial Daily that the new fiscal deficit target’s assumptions might be a “tad optimistic”, given that development expenditure will not be cut, while fiscal initiatives are provided for small and medium enterprises, and the tourism sector.

Hence, Chang opined that the impact on the KLCI would be “neutral to slightly negative”.

“The important thing is not just the budget but the assumptions on earnings, which remain too high in our opinion,” he said.

HSBC Bank economist for Asean Lim Su Sian echoed Chang’s sentiment, saying the fiscal shortfall could be a little wider than what the government is expecting.  

“Our rough estimates suggest that, even if oil prices do average at US$55 per barrel as the revised budget assumes, the fiscal shortfall could still be a little wider than what the government expects,” said Lim.

OCBC Bank economist Wellian Wiranto said the new fiscal deficit target would ultimately support market sentiment as it is “reflecting reality rather than deflecting responsibility”.

“Usually, a larger fiscal deficit is not something to be warmly welcomed by the market,” he said in a report following the announcement of the revised budget.

“However, in Malaysia’s case, the 0.2 percentage point upward tick in Budget 2015 will ultimately help sentiment,” Wiranto said.

If crude oil prices were to tumble to US$40 per barrel, it is highly likely that the government would have to restrain its spending further, possibly extending budget cuts to the development expenditure, said AllianceDBS Research economist Manokaran Mottain.

“Therefore, we maintain a cautious stance on the overall economic outlook for now,” he said in a report yesterday.

 

This article first appeared in The Edge Financial Daily, on January 21, 2015.

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