Malaysia's 2021 fiscal deficit expected to ease to 5.5 pct of GDP -- Moody's

Moody’s said given the government's expressed objective to provide ongoing support to the economy as it recovers from the shock, any hurdle to the recovery, for example, a more severe economic impact from the reinstated Movement Control Order (MCO 2.0) than currently assumed, may potentially be addressed through additional economic stimulus.

“As such, Moody's views risks to the fiscal deficit as skewed to the downside at least in 2021,” it said in a statement today.

Post-2021, Moody's expects that the deficit will narrow to around four per cent of the GDP by 2023, consistent with the government's 4.5 per cent of GDP average deficit target over 2021 to 2023.

While its projections incorporate some expenditure reduction and a recovery in revenue when the economy returns to potential, Moody’s pointed out that debt is nevertheless, likely to remain around 64-67 per cent of GDP through 2023, having jumped up to around 66 per cent of GDP at the end of 2020 from just below 56 per cent in 2019.

It also estimates that Malaysia’s debt burden is likely to remain at the current, higher levels over the next three to four years, even though the government remains committed to its medium-term fiscal consolidation objectives.

“A rapid reversal of the increase in debt due to the pandemic is therefore unlikely absent a faster pace of budget adjustment than is implied by the government's fiscal targets for 2021-2023.

“That said, the country's large pool of domestic savings can continue to finance the fiscal deficits and keep interest payments anchored,” it said.

According to Moody’s, Malaysia's debt burden is among the highest compared to similarly rated peers, while its debt affordability is among the weakest, with interest payments accounting for around 12-14 per cent of revenue over 2021-2023.

“These are compared to the median debt burden of 47 per cent of GDP and median interest payment to revenue ratio of 5.0 per cent for similarly rated peers as of the end of 2020,” it said.

In Malaysia's case, Moody’s said the fiscal challenge was magnified by the government's narrow revenue base, which had declined since the sharp fall in oil prices over 2014-2016, and the abolishment of the goods and services tax in 2018.

Moody's estimates that revenue as a share of GDP will fall to around 15-16 per cent in 2021, from a peak of around 21 per cent in 2012 and compared to the median of 34 per cent for similarly rated peers.

“Providing some offset to the weaker fiscal and debt metrics is Malaysia's large domestic savings pool, including retirement savings held in the Employees Provident Fund, which can continue to finance government deficits in local currency.

“This keeps interest rates anchored or otherwise consistent with the central bank's policy rate, and reduces government liquidity risk and the dependence on external financing, which tends to be more sensitive to risk sentiment,” it said.

Meanwhile, Moody’s said Malaysia’s environmental, social, governance (ESG) credit impact score stood at neutral to low (CIS-2), as strong institutions mitigate the moderate exposure to environmental risk through effective policies that provide resilience.

In terms of the rating for Malaysia’s exposure to social risk, Moody’s said the rate stood at neutral to low (S-2 issuer profile score), reflecting favourable demographics, wide access to quality education, housing, healthcare and basic services, as well as policies that address the needs of the B40, which mitigate income inequality.

“The influence of governance is positive (G-1 issuer profile score) in Malaysia, supported by solid executive and legislative institutions, reliable rule of law, and a track record of effective macroeconomic policymaking.

“That said, the revelation in recent years of high-profile incidents of corruption and lack of transparency in government expenditure, if widespread, may threaten the credibility of institutions and governance over the longer term,” it added.