Fitch said Malaysia’s economy is gradually recovering from a contraction of 5.6% in 2020 caused by the Covid-19 pandemic.
“We expect gross domestic product (GDP) growth of 4.5% in 2021 and 6.3% in 2022, as the output gap narrows and the vaccine rollout gathers pace, which should allow the services sector to benefit from pent-up demand,” it said in a note today.
Fitch said the government’s social distancing measures have been accompanied by material relief measures, including social security payments, wage subsidies, grants to small and medium enterprises (SMEs), allocation for the procurement of vaccines, corporate loan guarantees and a repayment moratorium on certain bank loans.
“As a result of this relief spending and reduced government revenue, we expect the fiscal deficit to rise to 6.5% of GDP in 2021 from 6.2% in 2020,” it said.
As the pandemic has caused a significant rise in Malaysia’s general government debt, in line with its rating peers, Fitch forecast the debt to reach 78.1% of GDP in 2021, from a pre-pandemic level of 65.2% in 2019.
“The debt figures used by Fitch include officially reported ‘committed government guarantees’ on loans, which are serviced by the government budget, and 1Malaysia Development Bhd’s net debt, equivalent in December 2020 to 12.7% and 1.4% of GDP respectively,“ it said.
On this basis, Fitch said, the debt burden is significantly higher than the median of 57% for sovereigns in the ‘BBB’ rating category.
“Malaysia’s gross debt is over 400% of revenue, around three times the peer median,” it said, expecting the debt ratio to decline slightly to 77% of GDP in 2022 and for this trend to continue, facilitated by the resumption of strong GDP growth.
On the medium-term fiscal outlook, the rating firm said it remained subject to heightened political volatility.
“We expect a gradual reduction in the fiscal deficit, which is forecast to average 5.2% of GDP over 2021 through 2023 (above the government’s average target of 4.5%) as growth lifts revenues and Covid-19-related spending measures lapse,” it said.
It said general government revenue was expected to remain low at 18.2% of GDP in 2021 (‘BBB’ median: 26.6%) and dependent on crude oil production, which the government expects to generate 16% of total revenue this year, a reduction from 25% in 2020, when Petroliam Nasional Bhd (Petronas) provided a special dividend.
According to Fitch, the low revenue base is exacerbated by the removal of the goods and services tax (GST) in 2018, which was replaced with a narrower sales and services tax (SST) and has in recent years led the government to draw on special dividends of government-linked companies.
“Lingering political uncertainty weighs not only on the policy outlook, but also on investment and prospects for an improvement in governance standards, in Fitch’s view,” it said.