THE Malaysian economy is expected to register a fiscal deficit of 7% in light of increased government spending to mitigate the economic impact of the Covid-19 pandemic, according to the World Bank.
World Bank’s lead economist for Malaysia Richard Record said Malaysia has limited fiscal space to narrow its deficit for 2020.
“Malaysia is constrained by legislation that bars its debt-to-GDP ratio to exceed 55% and if the pandemic worsens and more government spending is required, there may be a need for legislative changes,” Record said during a press conference after World Bank’s launch of its Malaysia Economic Monitor titled “Surviving The Storm”.
“Particularly with existing statutory limits, any further narrowing of fiscal policy space could constrain the government’s ability to provide adequate economic support, especially in the near term.
“The marked reduction in fiscal space presents a potential risk should the economic impact of the movement control order (MCO) be greater than anticipated, thus requiring additional fiscal injections, particularly to provide support to vulnerable households and businesses. These risks would be amplified by the occurrence of a second wave of the pandemic that could require the re-imposition of the MCO,” he added.
Costs associated with the Prihatin package and the Penjana plan are expected to result in an increase to government expenditure of RM45 bil in 2020. While the cost of the Prihatin package amounts to a total of RM260 bil, or 17% of GDP comparable to that seen in many advanced economies, the direct fiscal injection is fairly modest, amounting to RM35 bil (or 2.3% GDP). The bulk of the expenditure is on the one-off Bantuan Prihatin Nasional (BPN) cash assistance program for B40 and M40 households and on the wage subsidy programme, amounting to RM10 bil and RM13.8 bil respectively.
Record also said that Malaysia could increase its fiscal space in two ways. One was by widening its non-tax revenue base which was primarily made up of government-linked companies (GLCs) dividend payments. Among the GLCs that had generously contributed to the government’s coffers was state oil company Petroliam Nasional Bhd which in 2019 had paid a dividend of RM24 bil with an additional special dividend of RM30 bil to the government.
Another way was by reprioritising government expenditure. This could be done by strategically allocating resources to expenditure for the marginalised groups in time of the Covid-19 outbreak.
When asked whether the widening deficit would incur the wrath of international credit rating agencies by downgrading Malaysia’s credit rating, Record said Malaysia’s creditworthiness would not be adversely affected squarely if its deficit had widened. He reckoned that the factors that brought about the widening deficit need to be studied before a proper credit assessment could be undertaken. – June 25, 2020
