KUALA LUMPUR: S&P Global Ratings sees higher risks to the Malaysian government’s fiscal performance. But, on the other hand, the government’s austerity measures could hurt long-term economic growth.
With a narrow revenue base that is dependent on volatile revenue sources, Malaysia’s budget performance is more vulnerable to negative economic conditions than most others, said S&P credit analyst Kim Eng Tan in the credit rating report entitled Hope in Malaysia Comes with Some Questions for Sovereign Credit Support.
The report said that if the economy encounters negative conditions in the near future, a fiscal deterioration could weigh significantly on the government’s credit metrics unless the government is willing to introduce new revenue measures.
“We don’t expect Malaysia’s fiscal performance to deteriorate materially in the next few years mainly because of the government’s strong focus on fiscal stability,” said S&P, but it stressed that nevertheless, risks to fiscal performance have risen even if the government spends carefully.
The agency said Malaysia’s general government revenue-to-gross domestic product ratio is likely to slide further this year after it fell to a low of 17.7% in 2017. It noted that the ratio is already low among rated sovereigns, limiting its ability to expand social services and public investment. While the government has stopped or postponed some major infrastructure projects to control spending, S&P said this will limit new infrastructure spending in the near future and could also weaken long-term economic growth.
“If Malaysia’s capital spending slows markedly, its relative attractiveness as an investment destination could diminish to the detriment of its long-term growth prospects,” said S&P.
Moving forward, as new fiscal policies and priorities solidify, S&P highlighted the importance of the administration to ensure stable fiscal performance, even while pursuing worthwhile infrastructure projects.
“Otherwise, slippages in fiscal performance and growth prospects will weaken the support for our sovereign ratings on Malaysia,” said S&P.