This article first appeared in The Edge Financial Daily on December 5, 2017

KUALA LUMPUR: The projected narrowing of Malaysia’s fiscal deficit target to 2.8% of gross domestic product (GDP) under Budget 2018, from an estimated 3% in 2017, is achievable, said RAM Rating Services Bhd.

The rating agency also deems the adjustment to the government’s medium-term fiscal framework targeting fiscal deficit to an average 2.4% of GDP throughout 2018-2020, from a near-balance target by 2020, as “realistic”, saying it indicates a more gradual pace of fiscal consolidation.

“Fiscal revenue is expected to increase 6.5% to RM240 billion in 2018 as negative pressures ease. This will be largely driven by resilient economic growth and a gradual recovery in global commodity prices,” said RAM head of sovereign ratings Esther Lai in a statement yesterday.

“Notably, oil and gas revenue is projected to exceed the government’s budgeted amount given its conservative assumed oil price of US$52 (RM211.64) per barrel,” she added.

Nevertheless, RAM noted that the government’s contingent liabilities remained significant at 16.9% of GDP in the first half of 2017, which imposes a continuous risk on its fiscal position.

RAM estimates that this ratio will rise to 18.4% by 2023, premised on its expectations of existing and upcoming infrastructure projects, as well as the government’s routine commitments to housing and higher-education loan agencies.

“That said, stricter oversight over the issuers of these debts is likely following the establishment of the fiscal risk and contingent liability technical committee, and a possible introduction of a limit on guaranteed debt in the future,” it added.

Lai also noted that next year, operating expenditure (opex) is budgeted at RM235.7 billion (up 7.2% year-on-year), mostly due to higher amounts of social transfers in the lead-up to the 14th general election (GE14). “While the growth of emolument spending is likely to exceed the government’s projected 0.4% for 2018, arising from larger cash disbursements, the excess spending in this regard has been budgeted for in other line items,” she added.

“Additionally, we expect the continued roll-out of big infrastructure projects to elevate opex over the medium term, given such projects’ maintenance and debt service charges,” she said.

While there is a higher likelihood of fiscal slippage leading up to GE14, there is evidence that the government’s budgetary discipline has improved. Lai noted that fiscal slippage for emolument expenditure has been gradually declining since 2012.

Development expenditure is expected to remain flat at RM46 billion or 3.2% of GDP next year. “The slower rise of development expenditure underlines the government’s fiscal restraint, given its intention of containing its high debt levels and increasing use of off-balance sheet sources of financing.”