Moody's: Budget 2016 sustains fiscal consolidation but provides limited support to growth

by **Cals** Tue 27 Oct 2015, 00:40

Moody's: Budget 2016 sustains fiscal consolidation but provides limited support to growth

By Chester Tay / theedgemarkets.com | October 26, 2015 : 9:55 PM MYT

KUALA LUMPUR (Oct 26): [size=16]Moody's Investors Service says Malaysia’s 2016 budget keeps the government's credit-positive fiscal consolidation trend intact, while further reducing its reliance on oil revenue, but ‘does little’ in reform that provides long-term support to the nation’s economy.

“The budget, announced on Oct 23, could modestly encourage consumption by buffering lower-income households against higher living costs. But it does little to deliver structural reform that could provide longer-lasting support to the government's finances and the economy,” the credit rating agency said in a statement today.

Budget 2016 is targeting to reduce the deficit to 3.1% of gross domestic production (GDP).

Moody’s also said it believes that overall, the budget signals the government’s commitment to keep its fiscal deficit under control, despite the persistence of low commodity prices, slowing economic growth and strong political headwinds.

The agency added that the macroeconomic assumptions in Budget 2016 are realistic.

“The budget outcome hinges on real economic growth of 4% to 5% in 2016, in line with our expectations of 4.5% GDP growth in that year. It also assumes that global crude oil prices will remain low at US$48 per barrel in 2016, below Moody's assumptions of US$53,” it said.

Moody's noted the slow down in the pace of fiscal consolidation, casts some doubt on the government's ability to achieve its target of a balanced budget by 2020, which will require a steeper reduction in the deficit in subsequent years.

Nevertheless, it said the increasing reliance on goods and services tax (GST) receipts over oil-related income to drive revenue growth, enhances the sustainability of the government's fiscal tightening.

However, the rating agency said the budget provides some limited support to economic growth.

Budget 2016’s development expenditure particularly prioritised housing and transport infrastructure. It also sets a minimum starting salary and a pension rate for civil service pensioners, and increases cash transfers to lower-income households and single individuals.

“The measures outlined in the budget should modestly encourage private consumption, and public development spending can help to draw funding from the domestic private sector and raise foreign direct investment,” Moody’s said.

“Still, while domestic demand growth should be relatively resilient in 2016, support for economic output will likely be muted until domestic political uncertainty abates,” it added.
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