Friday 29 Mar 2024
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KUALA LUMPUR: Concerns over the government’s mounting contingent liabilities and off-balance-sheet obligations, including those amassed by debt-laden 1Malaysia Development Bhd (1MDB), are an increasing drag on investor confidence.

While World Bank senior country economist for Malaysia Frederico Gil Sander acknowledged that some of these extra obligations are “quite productive” investments, he also stressed the pertinent need for the government to be transparent on matters like 1MDB and contingent liabilities.

“The fact that the government has assumed these guarantees is not necessarily bad,” Sander told The Edge Financial Daily in an interview.

“On the other hand, [the] people are concerned about 1MDB. If the government could produce a fiscal risk statement on these kinds of contingent liabilities, that would give the public a comforted view that they (the government) have done some assessments,” he said.

“We think that a transparent analysis of the fiscal risks involved will be very important going forward,” Sander pointed out, adding that the additional discipline of habitual disclosure will enhance the scrutiny of the financial guarantees granted by the government.

Two weeks ago, Prime Minister Datuk Seri Najib Razak told Parliament that the government has off-balance-sheet obligations of between RM4.8 billion and RM11.62 billion a year for nine government-owned companies starting this year until 2020.

The figures have puzzled many, including economists, as there is a lack of detail on what the spending entails.

Sander pointed out that while it is difficult to pre-empt the likelihood of a Fitch Ratings downgrade of Malaysia’s credit rating, he expects the implementation of the goods and services tax (GST) and fuel subsidy rationalisation will help to strengthen the country’s credit standing.

But he highlighted that there is much more the government needs to do to maintain its long-term fiscal sustainability.

“To achieve the target of reducing the fiscal deficit to 0.6% by 2020, we are looking at the government imposing hard medium-term ceilings on ministries on how much new spending they are going to have moving forward.

“That communicates a lot more credibility as to how you are going to be achieving lower deficit numbers, which are to me what is important — to remain in a continuously declining fiscal deficit,” said Sander.

The World Bank economist also acknowledged the tension that the central bank had been juggling among various priorities — high household debt, slowdown in consumer spending and cooling down property prices. “These would give reason for Bank Negara Malaysia not to aggressively raise interest rates,” he opined.

But, on the other hand, there are also reasons for the central bank to consider cutting interest rates due to the concerns over the weakening ringgit and the current account balances.

“They’re basically pulled in two directions, which is why in recent times, we’ve seen that [the] interest rates have not moved,” Sander said.

He said the recovery of oil prices had also been a boon to the Malaysian economy, with the government likely to beat its fiscal deficit target of 3.2% of gross domestic product (GDP) to 3.1% of GDP because the current oil prices are higher than the US$55 per barrel budgeted in the revised Budget 2015. In addition, there were extra savings from the removal of fuel subsidies.

Commenting on the weak export data in April, which fell 8.8% year-on-year, Sander said the second-quarter data on real exports would be crucial to determine how much impact the weaker ringgit has had on boosting exports.

“On the E&E (electrical and electronics) side, it is fair to say that Malaysia has been losing competitiveness for many years. However, 2014 was the first year that you had lower imports than exports of E&E.

“We are starting to see some encouraging signs of a strong expansion of the value added despite lower exports, which suggests to me that the value-added quantum of the exports has also expanded,” he said.

Sander projected that Malaysia’s current account balance will narrow to 2.5% of GDP this year due to declining natural gas prices, greater investment abroad and higher imports by the private sector to rebuild their inventories.

“The weaker exchange rate made some of the equipment investments a bit more expensive, but a narrower surplus is not a major concern as long as it is driven by imports for productive investments, such as the Mass Rapid Transit,” he said.

 

This article first appeared in The Edge Financial Daily, on June 22, 2015.

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