This article first appeared in The Edge Financial Daily on November 7, 2018

KUALA LUMPUR: Malaysian Rating Corp Bhd (MARC) said Malaysia’s one-off spike in deficit target for 2018, as announced in Budget 2019, should in theory provide comfort to international credit rating agencies, as it shows the government’s efforts to get finances back on track.

As such, it does not expect a major reaction towards the country’s sovereign rating despite a weaker credit profile over the short term given the revised deficit and debt levels.

“This one-off adjustment is necessary to repair the country’s balance sheet and does not, in any way, imply fiscal profligacy,” the local rating agency said in a report entitled “Budget 2019: Getting Finances Back on Track” released on Monday.

In Budget 2019, the country’s fiscal deficit is projected to be 3.7% for 2018. However, the Pakatan Harapan administration expects its fiscal consolidation efforts to reduce the deficit to 3.4% in 2019, 3% in 2020 and 2.8% in 2021.

Notwithstanding this, MARC said perceptions of a possible adjustment in the country’s sovereign rating outlook could linger as concerns over the sustainability of revenue in the medium term persist in view of a possible moderation in global crude oil prices.

“We think the deficit target of 3% of gross domestic product (GDP) is achievable by 2020 if average crude oil prices remain above US$60 (RM250.80) per barrel and a real GDP growth remains on its trajectory of 4.5% to 5.5% in the next two years.

“In the longer term, the budget deficit trajectory will hinge on the continuing prudent management of operating expenditure and additional sustainable income streams that the government could introduce.”

Meanwhile, the revised budget deficit targets for 2018 and 2019 could result in a temporary upbeat financial market volatility as investors fully digest the government’s message, said MARC.

“Concerns about the ringgit’s movements will likely persist in the short term judging by the amount of net capital outflows recorded on a year-to-date basis.

“On a real effective exchange rate basis, the ringgit looks attractive as it remains at around minus one standard deviation below its long-term mean. However, with external factors currently supporting a stronger US dollar, the ringgit’s upside could be limited at this juncture.”

MARC also said the government’s proposal to allocate RM50 million to set up a co-investment fund to invest alongside private investors via equity crowdfunding and peer-to-peer financing is a step in the right direction.

“We opined that this measure would help boost investors’ participation within these platforms as the government’s support would help increase liquidity and promote the viability of such platforms. Small and medium enterprises stand to gain, and they would also have wider access to capital for their financing needs.”