KUALA LUMPUR (Nov 10): Fitch Solutions Country Risk and Industry Research is forecasting Malaysia’s 2022 fiscal deficit to come in at 6.3% of gross domestic product (GDP), compared with an estimate of 6.8% of GDP in 2021 and 6.2% of GDP in 2020.

In a report on Tuesday (Nov 9), Fitch Solutions said while this is largely aligned with the government’s revenue projection, its forecast reflects the likelihood for spending, especially on pandemic-related risks, to exceed the government’s projection, which sees a 6% fiscal deficit.

“We expect the government debt limit to be raised to 70% of GDP by the next election in July 2023, and are pessimistic about the long-term fiscal health of the country as the highly competitive political environment makes fiscal consolidation once the [Covid-19] pandemic ends unlikely."

Fitch Solutions said the government had underperformed its Budget projections over the past two years since the beginning of the pandemic.

It said that in 2020, revenue underperformed while expenditure increased as a result of the measures taken to combat the pandemic, leading to the actual deficit coming in at RM87.6 billion (6.2% of GDP), compared with a projected RM34.5 billion (2.5% of GDP).

“Government estimates for 2021 indicate that there will also be a slight degree of overshooting in 2021.

“In 2022, we expect pandemic-related risks to present a high likelihood of an increase in spending over the RM23 billion allocated for Covid-19 related spending,” it said.

The research house said that for 2022, it expects revenue to come in largely in line with the government’s projection of RM234 billion (14.8% of forecast GDP).

“That said, the alignment of our projections does not indicate a complete agreement with the government’s arguments.

“For starters, our 5.5% real GDP growth forecast for 2022 is on the lower end of the government’s forecast range of 5.5% to 6.5%, which indicates that the government is counting on the average on a higher level of economic activity than we are,” it said.

Moreover, Fitch Solutions said pandemic-related risks could affect economic activity, although this is more likely to be localised and transient compared to the long national lockdown in effect in the second quarter of 2020 and much of 2021.

“On the upside, however, the government has posited a lower average crude oil price of US$67/bbl, compared with our oil and gas team’s projection of US$73/bbl for 2022,” it said.