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High debt burden a challenge for new government – Moody’s

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KUALA LUMPUR, May 14 2018 : The new Pakatan Harapan (PH) government has inherited a strong economy, with growth averaging 5.5 per cent over the past eight years, but the country’s high debt burden remains a key credit challenge, said Moody’s Investors Service.

“We estimate Malaysia’s debt/gross domestic product (GDP) ratio to be at 50.8 per cent at end-2017, significantly above the 40.1 per cent median for A-rated sovereigns.

“Although the previous government had achieved eight consecutive years of fiscal deficit reductions to 2.8 per cent, as budgeted for 2018, lower expenditure mainly drove the consolidation, with the revenue share of  GDP falling since 2012.

“Given the government’s limited ability to trim further spending, the deficit and debt burden is expected to hover around current levels,” said Anushka Shah, Moody’s Sovereign Risk Group Vice President/Senior Analyst  in a statement today.

She also said a reversal of some past reforms without other adjustments risks widening the deficit, adding,  if the government chooses to implement some of its campaign promises without adjustments or offsetting measures, it would be a credit negative for Malaysia.

This includes the proposed abolition of the Goods and Services Tax (GST) to be replaced by the Sales and Service Tax (SST), as suggested by PH chairman, Tun Dr Mahathir Mohamad.

Anushka said on its own, it is unlikely for the SST to match the revenue collected from the GST, which totalled RM44.3 billion in 2017 or 3.3 per cent of GDP.

“Removing the GST also would introduce risks of a narrowing revenue base and increase reliance on oil-related revenue, which has declined since the GST’s introduction in 2014.

“Another proposal is the reintroduction of fuel subsidies, a credit-negative policy pledge because it would distort market-based price mechanisms which would affect Malaysia’s fiscal position through higher subsidies and the balance of payments through lower elasticity of oil imports to price movements,” she added.

According to Anushka, fiscal discipline was important to instil market confidence, particularly since non-residents held 28 per cent of outstanding government securities as of end-2017 and 28.5 per cent of the equity in Bursa Malaysia as of April 2018, which leaves the sovereign susceptible to swings in capital flows and investor sentiment.

“We project Malaysia’s external vulnerability indicator, which we use to measure sovereign exposure to a sudden stop in capital flows at 145.6 per cent in 2018, a high level globally, particularly when compared with other A-rated sovereigns.

“This takes into consideration foreign reserves that have steadily inched higher over the past year to touch US$102.9 billion as of end-April 2018. Other buffers, including large domestic institutions which provide a funding pool for local currency debt and current account surpluses act as mitigants,” she said. – Bernama

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