KUALA LUMPUR (June 8): Even if the Government exceeds its public debt to GDP level of 55%, sovereign credit downgrade is unlikely, according to MIDF Research.

In a note today, the research house said despite the government being on track of reducing its debt level from 54.5% to 53.0% this year, one risk remains i.e. if the nominal gross domestic product (GDP) grows much slower or even contract this year due to a recession.

“Although we do not think that the nominal GDP will contract this year, as long as the Government is able to keep its fiscal deficit at 3.1% to GDP, the total amount of Malaysian Governtment Securities (MGS), Government Investment Issues (GII) and Malaysian Islamic Treasury Bills (MITB) combined is still unlikely to breach the 55% debt ceiling level.

MIDF Research said too much attention has been given to the public debt to GDP level.

The research house said the more important question was the sustainability of Malaysia fiscal position.

It said Malaysia’s debt limit was set at 40% in April 2003, revised to 45% in June 2008 and subsequently 55% in July 2009.

“There was not even once when our sovereign credit rating was affected due to the increase in debt ceiling limit.

“We opine that the market and the public in general has been giving too much attention on the public debt to GDP level, without understanding the sustainability of the fiscal policy itself,” it said.

MIDF Research said despite rebuttal from the public, it strongly believes that the implementation of Goods and Services Tax (GST) and to reduce reliance from oil revenue is positive for Malaysia’s long term fiscal sustainability.

MIDF Research said the actual ‘limit’ is still far from breaching its threshold level.

“In fact, it should be noted that the 55% limit should only include MGS, GII and MITB.

“By that definition, our debt level as at end of 2015 was only at 48.3% to GDP, which is still far from the 55% debt ceiling limit,” it said.