This article first appeared in The Edge Financial Daily on November 8, 2018

Kuala Lumpur: Ratings agency S&P Global has expressed reservations about Budget 2019 as it foresees a number of challenges, including an increasing reliance on commodity revenue and the growing national debt.

Ratings agency S&P Global (Singapore) director of sovereign ratings Andrew Wood said although the new Pakatan Harapan administration had made great strides in terms of governance, transparency and the implementation of competitive tendering processes, the proposed budget has led to certain issues, chiefly, the higher accumulation of debt.

As Malaysia’s fiscal deficit is forecast to increase over the next year few years — growing from 2.8% of gross domestic product (GDP) in 2017 to 3.7% in 2018 and 2019 — the government will have to continue raising debt to finance its programmes, Wood said yesterday at a 2019 Post Budget Debate organised by the Malaysian Economic Association.

The increased debt-to-GDP ratio would continue to worsen, he added, as the new government would likely also have to spend on contingent liability guarantees.

At the same time, the country’s wider tax base has been hit by the scrapping of the goods and services tax resulting in a fallback reliance on commodity revenue, particularly petroleum, which prices tend to fluctuate.

On the positives, Wood highlighted the country’s consistent growth trend, sound external regulations and the current account surplus of 2% to 3%.

During a question-and-answer session, Wood was asked why S&P had been inconsistent in its reporting of contingent liabilities. He maintained that S&P, which has Malaysia’s sovereign at A-, has always been consistent in its reporting of contingent liabilities and that part of this reporting is constituted by governmental disclosure.