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KUALA LUMPUR, NOV 3 – When news of Malaysia’s increasing budget deficit over the years got more attention prior to the Budget 2014 announcement, Malaysians were left with little confidence in what the Government could do for the country. This was in part also due to ratings agency Fitch, which revised Malaysia’s sovereign credit rating outlook from ‘Stable’ to ‘Negative’ this July, due to the deterioration of public finances and weakened fiscal consolidation and budgetary reform. The management of funds that the Government was embroiled in struck a serious chord with Malaysians who felt leakages and corruption were to be blamed here. Analysts then took the opportunity — before the Budget tabling — to share their suggestions of measures that the Government could take to tackle the fiscal deficit. Most opined that serious fiscal reforms be the main aspect to be addressed in the Budget, while it looks into cutting subsidies, rescheduling major infrastructure projects and implementing tax measures. Come the day of the Budget tabling, Prime Minister Datuk Seri Najib Razak announced it to be formulated to ensure the economy continues to expand at a strong pace and reduce the fiscal deficit. According to the Budget, the Government aims to cut the fiscal deficit from 4% of GDP this year to 3.5% next year and 3% in 2015. It also stated that GDP next year is forecast to expand in a range of 5% to 5.5%, up from an estimated 4.5% to 5% in 2013. Its main measures include the introduction of the Goods and Services Tax (GST), removal of the sugar subsidy, the previous reduction in fuel subsidy and the restructure of the overall subsidy system. BUT IS THIS ENOUGH? In response to these structures, Fitch Ratings stated, “The Malaysian government’s restatement of its commitment to lowering the Federal Government deficit, and introduction of the Goods and Services Tax (GST), are potentially constructive steps.” Although, Fitch also said a track record of budget management remains key to limiting further credit pressure on the sovereign rating. On the objective of cutting the deficit of 3.5% of GDP in 2014 and 3% by the following year, Fitch stated this to signal a potential intensification of efforts to consolidate government finances. It does however note that the steps to achieving the outcome of the reduction in subsidy expenditure are not yet fully identified and remain subject to external shocks. With regards to the introduction of the GST, “Fitch feels this is a key reform which could strengthen the credit profile by broadening the revenue base and lessening the budget’s dependence on petroleum-derived revenues.”
MIG-29 Jet Fighter
MIG-29 Jet Fighter
More recently, Najib announced putting on hold the purchase of replacement fighter jets for its current fleet of Russian-made MIG-29s, which could cost billions of dollars. The Defense Ministry previously shortlisted five manufacturers from which the former sought to buy 18 replacement combat aircrafts by 2015. Najib reportedly said the move to delay the purchase came from the realisation of the Government’s need to consolidate its fiscal position first, stating this is what both the people and the market wanted. The Prime Minister also mentioned prioritising the securing of the macro position of the government to make sure Malaysia’s deficit is cut and at the same time spend on the defense level it can afford to do. On Malaysia’s active move to reduce the budget deficit, Fitch said it is heavily reliant on expenditure restraint, and a track record of sound budget management and implementation will be integral to its assessment. Article by Rajina Dhillon.

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