Image Credits: Bloomberg News
Malaysia’s goal to reduce its fiscal deficit to 3% by 2026 is deemed “challenging but achievable” by Malaysian Rating Corp Bhd (MARC). The agency suggests that a focus on the economic growth-interest rate differential could be key to improving fiscal health. Specifically, MARC advocates for maintaining a differential of at least 0.9, while keeping annual debt growth below 8%.
MARC highlights that using this differential as a metric offers a nuanced view of fiscal sustainability, differing from traditional deficit and debt ratios. Current projections indicate Malaysia is on track to meet this differential target, although boosting economic growth remains essential for long-term stability.
From 2014 to 2023, Malaysia’s average differential was a positive 0.2%. However, in 2023, it turned negative at -0.2% due to weaker-than-expected domestic growth. Despite this setback, Malaysia performed better than several advanced economies, emerging markets, and ASEAN neighbors, which all reported declines.
The agency underscores the need to consider contingent assets in fiscal evaluations, which can stabilize the economy in times of need. For instance, Petroliam Nasional Bhd (PETRONAS) contributed RM85.7 billion to government revenue in 2023, reinforcing the importance of strong state-owned enterprises. Additionally, Malaysia’s liquid assets totaled over RM220 billion in 2023, surpassing the fiscal deficit of 5%.
MARC notes that Malaysia’s contingent assets are adequate to cover government-guaranteed debt. However, potential liabilities may arise from the financial commitments of government-linked corporations, particularly in the banking sector. The interplay between sovereign ratings and banking health is crucial, as changes in credit ratings can affect funding costs and risk assessments.
Furthermore, rising pension obligations pose a concern, with figures reaching RM22.5 billion in 2023 and projected to rise to RM25 billion in 2024. These factors collectively paint a complex picture of Malaysia’s fiscal landscape, emphasizing the importance of strategic planning and growth-oriented policies.