This article first appeared in The Edge Financial Daily, on November 19, 2015.

KUALA LUMPUR: Malaysia is facing rising debt-servicing cost as a percentage of revenue, which is expected to hit 11.4% in 2016 — higher than most of its emerging-market peers — given its relatively hefty debt load and weaker earning prospects, said RAM Rating Services Bhd.

“Similarly, the government’s contingent liabilities — mainly in the form of outstanding government-guaranteed debt — came up to a sizeable 15.6% of gross domestic product (GDP) as at the end of second quarter 2015, and presents a latent risk to the country’s fiscal position,” said the rating agency in a statement yesterday.

It also highlighted that there has been “little information on the long-term management of these liabilities in Budget 2016”, though it noted that Malaysia has tightened its criteria vis-à-vis issuing guarantees on debts, which must also have relatively long and manageable maturity profiles.

Its observations came even as it noted that the government’s sizeable debt burden has been gradually reducing, from 53% of GDP in 2013 to an estimated 51.9% in 2015 and 51.6% in 2016.

Nevertheless, it believes that Malaysia’s 2016 fiscal deficit target of 3.1% of gross domestic product is achievable — with a potential upside given the government’s conservative average oil price estimate of US$48 (RM210.72) per barrel against its estimate of between US$50 and US$55 — and that its sovereign ratings (gA2 and seaAAA) will remain intact as the country’s growth is expected to stay resilient at 4.4% in 2016.

“Notably, petroleum-related fiscal revenue, which accounted for 33% of total revenue in 2010, has only been budgeted to come in at 12.6% of total revenue in 2016, versus RAM’s projection of 14.1%.

“Based on our sensitivity analysis, however, the potential upside would be offset by a mild decrease in corporate tax revenue of some 0.1% of GDP, and higher-than-budgeted emolument spending — in line with historical trends.

“After accounting for these adjustments, we believe that Malaysia’s targeted fiscal deficit for 2016 is achievable,” it said, adding that the government’s targeted average fiscal deficit of 2.7% of GDP for 2016-2018 indicates that it remains committed to its fiscal-consolidation objectives.

RAM also maintained its view that past policies, including the removal of retail fuel subsidies and the goods and services tax (GST) roll-out, were positive to fiscal sustainability.

It said the measures “have mitigated the immediate fiscal impact of lower petroleum-related revenue in 2015 and provided the underlying basis for long-term fiscal consolidation”.

It also noted that the government has introduced a Medium-Term Fiscal Framework (MTFF) alongside Budget 2016, to provide some guidance on its fiscal position and help anchor expectations on domestic macroeconomic conditions, but said the level of disclosure on the MTFF remains limited.