The ratings agency said despite weaker external demand as well as volatile commodity and financial markets, the government has maintained a credit-supportive fiscal consolidation path on its 2020 Budget as it targets a deficit of 3.2% of gross domestic product (GDP) next year, wider than its original 3.0% goal.
The 2020 deficit is, however, smaller than the projected deficit of 3.4% of GDP in 2019, it said.
“Excluding one-off revenue and expenditure items from 2019, the 2020 Budget – the government’s second since it came to power in May 2019 – is based on a 4.8% year-on-year increase in revenue and a 6.5% rise in expenditure.
“As a share of GDP, this would mean an extension of the fall in revenue that has been underway since 2012, highlighting the deterioration of the government’s income base,” Moody’s said.
The ratings agency said this in its note titled “Government of Malaysia: Growth-focused budget pursues continued deficit reduction; government may narrowly miss targets amid weak demand”, released today.
Moody’s noted that for revenue, this included a RM30 billion special dividend from Petronas, while expenditure incorporates a one-off allocation for outstanding tax refunds of RM37 billion.
The revised revenue estimates for 2019 factored in a small rise in receipts from the sales and services tax (SST) while the Special Voluntary Disclosure Programme will also contribute to larger individual and corporate tax collections.
Meanwhile, expenditure will be slightly greater than budgeted due to fuel subsidies, even as project rescheduling and cost revisions lower development spending, it said.
“Under current fiscal considerations, we expect government debt will edge close to 55% of GDP in 2019 and 2020. At these levels, debt remains higher than the A-rated median forecast of 37.6% for 2019, emphasising fiscal constraints as a key credit challenge for Malaysia,” Moody’s said.
Weaker revenue has also weighed on debt affordability. Based on government estimates, interest payments amounted to 12.5% of revenue in 2019.