MALAYSIA’S still-wide deficit for 2021 will increase the government’s fiscal consolidation challenge over the next few years and imply a backloading of efforts to reduce its debt burden over 2022-2023.
In this regard, Moody’s Investors Service forecasts Malaysia’s direct debt burden to remain above 62% of its gross domestic product (GDP) by the end-2021 compared to below 53% at the end of 2019.
“Furthermore, in the absent of a sharper narrowing of budget deficits beyond 2021 that is implied by the government’s medium-term target, Malaysia’s debt burden is likely to remain high over the medium term, a credit weakness for the sovereign relative to peers,” said the rating agency’s assistant vice-president (analyst risk group) Christian Fang in a statement.
Very broadly, however, Moody’s noted that Malaysia’s 2021 budget – if approved – will continue to aid the economic recovery from the large COVID-19-induced shock.
“In particular, the ongoing focus on wage subsidies and financial assistance to households and small and medium-sized enterprises (SMEs) will support domestic demand by averting large-scale layoffs and business closures,” opined the rating agency.
All-in, Moody’s expects Malaysia’s real GDP growth to rebound to more than 7% next year from a contraction of around 5%-5.5% this year.
World Bank lead economist Richard Record cautioned that fiscal responses to the ongoing health crisis – coupled with a persistent decline in government revenue – will pose a challenge to the medium-term fiscal outlook
“Like governments across the world, Malaysia has depleted much of its available fiscal space and will exit the crisis with a larger burden of debt and contingent liabilities,” he noted in a statement.
“This has resulted in difficult intertemporal constraints for the government to further expand expenditures on relief and consumption-supporting stimulus over the near term, which may leave the government less equipped to invest in lasting recovery and growth tomorrow.”
Nevertheless, Record applauded the announcements of several medium-term fiscal reform initiatives, including the development of the Medium-term Revenue Strategy (MTFF) to address the fiscal legacies of the crisis, and to enhance the government’s revenue capacity to sustainably finance Malaysia’s long-term sustainable and inclusive growth agenda.
“However, the path to an economic recovery is subject to continued downside risks,” he opined.
“These notably include a slower than expected return to growth for the world economy leading to continued suppression of investors sentiment, the many uncertainties surrounding the development and deployment of COVID-19 vaccines and treatments, as well as the risk of enduring economic and social scars resulting from the recession.”
With an optimistic revenue collection target and record development expenditure allocation for 2021, key factors that will ensure successful implementation of Budget 2021 includes efficient planning, proper execution, and enhanced transparency, according to United Overseas Bank (M) Bhd senior economist Julia Goh.
“A dedicated unit under the Ministry of Finance (LAKSANA) is tasked in ensuring effective and efficient implementation of all initiatives under the stimulus packages across all ministries and Government agencies,” noted Goh.
“LAKSANA provides weekly updates on implementation of the stimulus packages and recovery plans here.”
As 2021 is a transitional year from crisis to recovery, Goh noted that the government continues to prioritise the well-being of the people, assistance to businesses, and revitalising the economy.
“Budget 2021 is the first budget under the 12th Malaysia Plan (2021-2025), hence there are also measures aligned to the medium-term development of the country under the new normal,” she observed.
“The budget is expansionary albeit adopts a more targeted approach with bulk of the social spending for the lower income groups and hardest hit segments.”
Bank Islam’s chief economist Mohd Afzanizam Abdul Rashid observed that the fiscal discipline mantra of Budget 2021 is very much ingrained in the DNA of credit rating agencies (CRAs).
“Remarks from the CRAs will be closely watched as this will give an impact to the bond markets,” he pointed out in a review of Budget 2021, noting that political dynamics will also be taking the centre stage.
“The government is treading on a thin ice, balancing between doing the right thing and garnering supports from the Members of Parliaments (MPs) from both aisle,” he justified.
“It is interesting to see the Constitutional Monarchy has become a stabiliser to the current predicament. This could be a plus point the way we see it.”
MPs will vote to pass Budget 2021 on Nov 23. – Nov 7, 2020
