Fiscal space for COVID-19 pandemic needs to be rebuilt, says BNM

Governor Datuk Nor Shamsiah Mohd Yunus said the Ministry of Finance (MoF) had also indicated that efforts are currently underway to enhance the tax framework, reduce leakages, as well as broaden and diversify the revenue base to reduce the country's dependency on commodities.

"All these will help to ensure long-term sustainability of Malaysia's fiscal position," she told reporters after announcing the fourth-quarter 2020 economic performance held virtually today.

Nor Shamsiah was answering a question from the floor on whether the government has the flexibility in the fiscal policy space if the need arises.

She noted that the government has the extra flexibility to borrow in the event further support is needed for the economy.

"The government is also exercising prudence in its efforts to support the economy. For example, the recently announced PERMAI (Malaysian Economic and Rakyat's Protection Assistance Package), assistance package is not expected to result in higher fiscal deficit as it will be financed through recalibration of allocation in Budget 2021," said Nor Shamsiah.

The fiscal deficit target remained at 5.4 per cent of gross domestic product this year, she added.

Meanwhile, BNM expects loan impairment to remain manageable during the second Movement Control Order (MCO 2.0) implemented in January 2021, supported by strong buffers of the banks.

Nor Shamsiah said the impact of MCO 2.0 was less severe, unlike in 2020 as local banks had prepositioned themselves against higher credit risk by building up provisions for loan losses which increased by over 40 per cent year-on-year.

"We have seen many banks already frontloading provisions as they expect to make loan losses going forward. Along with ample liquidity in the banking system, banks are therefore well-placed to continue supporting the economy."

The governor was responding to a question on whether the central bank was expecting non-performing loans and loan impairment to increase due to the MCO in 2020 and whether loans to small business and individuals were increasingly at risk amid unemployment and under employment.

Nor Shamsiah noted that BNM will be updating its assessment of the credit risk outlook that will be published in the upcoming Financial Stability Review report.