Malaysia's Fiscal Deficit Target Of 3 Pct By 2026 Challenging But Achievable - MARC

KUALA LUMPUR, Sept 23 (Bernama) -- Malaysia’a fiscal deficit target of three per cent by 2026 “remains challenging but achievable,” according to Malaysian Rating Corporation Bhd (MARC).

It said the country can improve its fiscal deficit by targeting an economic growth-interest rate differential metric (differential) of at least 0.9 while keeping debt growth below eight per cent annually.

The rating agency noted that economic growth relative to interest costs as a metric could offer an alternative assessment of fiscal sustainability, compared to conventional fiscal deficit and debt ratios.

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“Malaysia is on track to meet the differential target based on current projections, which is encouraging.  However, raising economic growth remains essential to improve the differential further and ensure long term fiscal sustainability,” it said in a statement today.

MARC emphasised that conventional debt-led indicators might result in a limited analysis, thus by broadening the scope and innovating the metrics used, a more comprehensive view of Malaysia's fiscal health can be attained. Higher economic growth relative to borrowing costs would lead to passive deleveraging, which would lower the debt-to-gross domestic product (GDP) ratio naturally, the agency explained.

From 2014 to 2023, Malaysia's average growth-interest rate differential was positive at 0.2 per cent.

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However, in 2023, the differential turned negative (-0.2 per cent) due to lower-than-expected domestic economic growth. Despite this, Malaysia fared better than many advanced economies (-1.8 per cent), emerging markets (-1.9 per cent), and ASEAN countries (-0.3 per cent).

MARC also highlighted the importance of considering contingent assets, which are often overlooked in fiscal assessments as these assets can play a key role in stabilising the economy when needed, thus providing a more balanced fiscal perspective.

Petroliam Nasional Bhd (Petronas), for instance, contributed RM85.7 billion to government revenue in 2023 and plays a dominant role in the domestic economy.  Additionally, liquid assets, such as funds, cash, and cash equivalents, exceeded RM220 billion in 2023, equivalent to 12 per cent of Malaysia’s GDP, more than Malaysia’s fiscal deficit of five per cent as at 2023.

It noted that Petronas’ financial strength is vital for supporting Malaysia’s fiscal position, which is further reinforced by the country’s sizeable sovereign wealth fund. As such, Malaysia’s total contingent assets are estimated as sufficient to cover government-guaranteed debt, it said.

Conversely, contingent liabilities could arise from the financial obligations of government-linked corporations, particularly in the financial sector.

“The relationship between sovereign ratings and the banking sector is reflexive. Changes in a country’s credit rating can impact banks’ funding costs and risk assessments, while the health of the banking sector can, in turn, influence the sovereign rating,” MARC said.

The agency also raised concerns over rising pension obligations, which reached RM22.5 billion in 2023 and are expected to increase to RM25 billion by 2024. Despite an estimated pension fund size of RM169.8 billion in 2022, generating RM6 billion in investment income, the fund remains insufficient to cover growing pension payments.

"To address these fiscal pressures, the government has introduced reforms, including enrolling new public sector recruits into the Employees Provident Fund instead of traditional pension schemes.

"Additional measures, such as raising the retirement age and increasing employee contributions could further improve the fund’s self-sufficiency and ease long term fiscal pressures," it added.

-- BERNAMA