By Lee Wei Lian
KUALA LUMPUR, Aug 8 ― Already weaker than its similarly rated peers, Malaysia’s finances could come under further strain and experience increasing drag on its profile, Fitch Ratings said today.
The global ratings agency also said that the rising negative fiscal pressures may eventually offset the country’s credit strengths unless structural weaknesses in public finances are addressed.
Fitch said that revenue collections have been “muted” even as the size of its debt has grown and interest payments are expected to equal 10 per cent of revenues in 2012, which restricts the government’s ability to allocate fiscal resources to sectors that could support Malaysia’s long-term growth, and potentially arrest the sustained increase in the debt-to-GDP (gross domestic product) ratio.
“Fitch is concerned that the authorities may seek to raise the debt ceiling rather than implement austerity measures to remain within the existing fiscal framework,” said the report. “Thus, alterations to the current debt ceiling would be viewed as a credit negative.”
The report said that federal government debt is expected to rise through to 2016 if there is no material fiscal reform but is still expected to remain below the existing federal debt ceiling of 55 per cent of gross domestic product (GDP) until 2014. Putrajaya has been spending money on a slew of programmes for various demographics ahead of the Budget 2013 to be tabled next month.
It added, however, that the federal debt ceiling was raised from 45 per cent to 55 per cent of GDP in July 2009 following the global financial crisis, and prior to that, the ceiling was also raised in April 2008 from 40 per cent of GDP. It warned that raising the debt ceiling again would be viewed negatively.
But the ratings house said Malaysia’s strengths include low domestic interest rates, high current account surpluses and ample liquidity in the banking system, which have allowed the government to finance its deficits through mostly MGS (Malaysian Government Securities) and government investment issues.
It added that Malaysia’s ringgit-denominated treasury debt is now about 50 per cent of GDP with most on a long-term maturity and fixed rate basis.
Fitch noted that national pension fund Employees Provident Fund (EPF) is a particularly strong support to funding conditions, holding one-third of outstanding MGS.
The report also noted that Malaysia’s debt-to-revenue ratio is now on par with more heavily-indebted “A” range sovereigns such as crisis-hit Italy.
It said that the poor debt-to-revenues ratio stems from a narrow revenue base.
At 22 per cent of GDP, federal government revenues are on par with the Emerging Asia peer median. Compared with both the ‘A’ and ‘BBB’ range medians of 34 per cent and 32 per cent of GDP respectively, however, Malaysia’s fiscal resources appear significantly lower.
Some economists previously said that the federal government’s debt ― which nearly doubled since 2007 to RM421 billion, far outpacing revenue that only grew 31 per cent from RM140 billion to RM183 billion during the same period ― could impair Malaysia’s resilience to economic shocks, which appear to be occurring with increasing frequency.
While the Najib administration has vowed not to let federal government obligations exceed 55 per cent of the country’s GDP, there is also worry that when government-backed loans or “contingent liabilities” are taken into account, the government’s total debt exposure has been estimated to have already hit 65 per cent of GDP last year.