KUALA LUMPUR (Dec 4): 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 and underscores the government’s commitment to long-term fiscal consolidation, said RAM Rating Services Bhd.

It also deems the adjustment to the government’s Medium-Term Fiscal Framework (MTFF) targeted fiscal deficit to an average 2.4% of GDP throughout 2018-2020, from a near-balance target by 2020, "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 (which should support GST collections) and a gradual recovery in global commodity prices (which will be positive for the government’s oil and gas [O&G]-related revenue)," said RAM head of sovereign ratings Esther Lai in a statement today.

“Notably, O&G revenue is projected to exceed the government’s budgeted amount given its conservative assumed oil price of US$52 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 expectation 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.

"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," said Lai.

"Additionally, we expect the continued roll-out of big infrastructure projects to elevate operating expenditure 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 the GE14, there is evidence that the government’s budgetary discipline has improved. She noted that fiscal slippage for emolument expenditure has been gradually declining since 2012, while spending on supplies and services was kept at 2.4% of GDP in 2016 and 2017.

Meanwhile, development expenditure is expected to remain flat at RM46 billion or 3.2% of GDP next year, said RAM. This is lower than the RM52 billion average allocation implied under the 11th Malaysia Plan and also the average of 4.6% for 2010-2015.

"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 for large development projects.

"Correspondingly, federal government debt remains elevated despite the anticipated decline to 50.3% of GDP by end-2018 from an estimated 51.2% in 2017. The government’s hefty debt burden translates into a relatively high debt service-to-revenue ratio of 12.6% in 2018, that is, higher than those of Malaysia’s peers in the region (Thailand: 4.7%; Indonesia 11.7%)," said RAM.

"This is exacerbated by higher bond yields following the adjustment of the Foreign Exchange Administration rules in November 2016. That said, these effects have since partially normalised," it added.