Too early to gauge Unity Govt's impact on economy - Moody's

Assistant vice president and analyst of sovereign risk group Nishad Majmudar said it was too early to say whether the political noise has diminished or increased under the current unity government, given that the general election (GE15) just took place last November.

"Broadly speaking, given the parameters around the unity government and the fact that they have proposed a set of fiscal reforms over the course of this year, those are some of the signals that we would look to as far as their potential to reduce some of the political noise.

"From our perspective, we will look at the probability of the momentum behind some of the reforms like the Fiscal Responsibility Act, for example, that was high on the list in the current government's kind of low-hanging fruit to implement," he said during the Moody's virtual media roundtable titled "Inside ASEAN: Malaysia" today.

With the state elections coming up, Nishad said it would be interesting to see to what extent the elections could benefit the unity government in terms of possible additional political capital to pursue some of those fiscal reforms.

He said the rating agency has acknowledged the resilience of Malaysia's key economic policy institutions, particularly given the political uncertainties and political noise since GE14, where institutions like Bank Negara Malaysia and the Ministry of Finance (MOF) have been able to deliver on their policy objectives over the past few years despite the political noise.

"It is important to note that we currently assess that the political noise of the last several years has not affected the ability of key institutions like BNM and MOF to execute their mandates.

"However, we do assess that the noise has inhibited the passage of some of the deeper reforms in fiscal initiatives that the current government and previous governments have proposed and that would support the credit profile in an upward direction," Nishad said.

Looking ahead, he noted that the country still remains in a somewhat uncertain political and policy environment with the potential for gridlock.

"On top of that, we do think there are high demands from the public for continued fiscal support for the economy, given that the recovery has not fallen equally on all segments of society and income groups. Therefore, we do think there are downside risks.

"It is not a baseline scenario, but there are downside risks to our assessment of policy effectiveness, should the political environment inhibit some of the upcoming reforms that have been proposed in previous and current governments as well," Nishad said.

These, he said, would include some of the key reforms that would be the expansion of the revenue base in various forms, such as the reintroduction of the goods and services tax (GST) or sales and services tax (SST) expansion, subsidy rationalisation, as well as a reversion to some of the pre-COVID fiscal rules like the statutory debt ceiling of 55 per cent of gross domestic product (GDP).

"Finally, key reforms also include legislation that has been proposed and potentially tabled in Parliament this year but has yet to come to fruition such as the Fiscal Responsibility Act and the Government Procurement Act," he added.