Moody's: Malaysia's proposed fiscal reforms are credit positive if implemented

by **Cals** Mon 28 Oct 2013, 19:32

Business & Markets 2013

Written by theedgemalaysia.com

Monday, 28 October 2013 17:42

KUALA LUMPUR (Oct 28): Moody's Investors Service said Malaysia's (A3 stable) Budget 2014 with its call for fiscal consolidation and reform of the country's subsidy system would, if fully implemented, be credit positive for the government's finances.

But Moody's noted that structural fiscal weaknesses will remain, and execution risks will present challenges to the effectiveness of the government's fiscal policy strategy.

The budget calls for a reduction in the fiscal deficit to 3.5% of GDP in 2014, lower than the government's estimate of 4.0% in 2013.

“Yet the budget deficit will remain wider than it was in the years immediately before the 2008 global financial crisis,” said Moody’s in a statement.

It noted that expenditure restraint will be the primary driver of the planned reduction in the deficit in 2014, rather than growth in revenue.

“Notably, development expenditures are set to fall for a second consecutive year; a development which will negatively impact GDP growth in 2014.

A key feature of the he budget is the 15.6% cut in the total subsidy bill in 2014 from 2013. However, subsidy expenditure will remain elevated when compared with the historical level prevalent before the commodity price boom and the global financial crisis in 2008.”

Moody's also noted that the cutback in subsidy spending is driven in part by the September increase of MYR0.20 per liter in diesel and low-grade petrol prices.

“However, this increase alone will not likely be enough to achieve the intended reduction in fuel subsidies in 2014,” the rating agency added.