The Government is confident of achieving 3.7% and 3.4% of fiscal deficit to GDP in 2018 and 2019 respectively. I have checked with the preliminary financial accounts that were closed last year and the Government’s fiscal position is well within the 3.7% of GDP deficit target for 2018. Nomura’s report that the 2018 fiscal deficit would deteriorate to 3.9% of GDP is simply untrue. Furthermore, sales and service tax (SST) collections exceeded our initial projection by 34% at RM5.4 billion, compared to the projected figure of RM4 billion (see chart).
In contrast to the research house’s opinion, multiple structural reforms announced by the Government are already happening. The major ones include:
• The implementation of zero-based budgeting to increase the efficiency of government spending this year that will have immediate impact.
• The comprehensive application of open tender across all ministries since last year to increase transparency and effectiveness of government spending immediately.
• The ongoing migration from cash towards accrual basis accounting, which will come into force by 2021, to increase transparency in public finance in the medium term.
• The reprioritisation of infrastructure projects like MRT2, MRT3, LRT3 and others to increase its financial viability and reduce the financial burden on the Government immediately, which has resulted in savings of more than RM27 billion.
• The establishment of Tax Reforms Committee and Public Finance Committee to diversify government revenue while proceeding with fiscal consolidation without reducing growth.
The Government has been upfront that the fiscal reforms will take 3 years to complete. More measures will be announced for 2020, in addition to the measures announced during the 2019 Budget.
The Government has conveyed the same message on the time required to complete the reforms to various parties, including the top credit rating agencies Fitch Ratings, Moody’s and S&P. All three credit ratings agencies understand the amount of time required to carry out the reforms and as a result, they have maintained the Government’s credit ratings at A3 or A-, especially when the current Government has been more transparent about its fiscal position and financial obligations than the previous administration.
Additionally, Nomura is worried that the fiscal deficit ratio may rise due to crude oil prices that is currently at USD60.90 per barrel at press time. The Government would like to highlight that apart from the one-time RM30 billion special dividend from Petronas needed to partially finance the payments of unpaid GST and income tax refunds, the estimated Government’s dependence on petroleum income this year is only 19.5% and this is without GST revenue. In contrast, in 2009, the petroleum revenue made up of only 41.3% of government income. This suggests that while petroleum is an important source of revenue, it is becoming less and less important to public finance. Analysts should take the low energy prices within this context, as well as the fact that the Government is introducing new measures like the soda tax and the sales of non-core, non-strategic assets that are not accounted for in the fiscal deficit numbers, as highlighted in the 2019 Budget documents available publicly and online. These additional measures will be enough to function as a comfortable buffer if the average Brent crude oil prices hover within the USD50-USD70 per barrel band
Finally, Nomura’s concern over the political stability of the Government is misplaced and overdone. It ignores the recent development that indicates political stability in Malaysia. At present the ruling Pakatan Harapan is also the only political coalition that can represent Malaysians by demography or geography, from all races, religions and backgrounds whether they are from Perlis, Johor, Sabah or Sarawak.
Any change in leadership as agreed beforehand will be done orderly within legal and democratic norms. Malaysia is a democracy and debates are part of robust democratic culture. These debates do not distract the Government from implementing its scheduled reforms.
Lim Guan Eng
Ministry of Finance Malaysia
10 January 2019