MARC: Budget deficit could rise to 6.0-6.5% of GDP in 2020

PETALING JAYA: After the government’s announcement of the National Economic Recovery Plan (Penjana) on June 5, Malaysian Rating Corp Bhd (MARC) now foresees a budget deficit of between 6.0%-6.5% of gross domestic product (GDP) in 2020, slightly lower than the level registered during the global financial crisis.

“This is to be expected and will not pose much problems to the economy as budget deficits are escalating everywhere in the region,” it said.

MARC added that investors would be more focused on the federal government debt level which is just shy of the self-imposed limit of 55% of GDP.

“Given that budget deficits are likely going to rise to around RM85-RM90 billion in 2020, according to our estimate, Malaysia’s debt level would likely breach its self-imposed limit in the near term.

“Having said this, the plus point is that Malaysia’s government debt is predominantly sourced domestically through issuances of MGS, GII and MITB. This, to some extent, insulates the government from foreign exchange risks,” it said.

The more important point to consider would be the reaction by international credit rating agencies, said MARC, which have so far have expressed confidence on Malaysia’s sovereign rating.

“Notwithstanding this, given that government debt could now surpass its self-imposed threshold, the guessing game over international rating agencies’ future reaction will continue. This is despite the fact that from a macro perspective, a sovereign rating is not really a testimony of a country’s economic performance. It is merely an assessment of the government’s ability and willingness to service its debt fully and on time.

“And in the case of Malaysia, the federal government foreign currency-denominated debt only accounts for a mere 3% of total government debt,” it added.

Overall, the rating agency said although the financial market has remained resilient, it is worthwhile to once again draw up a specific game plan to safeguard it should volatility increase.

“An especially weaker currency would lead to falling business confidence, rising imported inflation and increasing portfolio capital outflows. All these would affect investors’ confidence on the overall economy. Ultimately, the success of a recovery plan hinges largely on its execution. Hence, proper coordination in carrying out its implementation is critical to stabilise and uplift the economy to its potential again,” it said.

The total Penjana package amounts to RM35 billion, of which RM10 billion will come from direct government fiscal injection. The plan comprises three key thrusts to support the economy in the era of the ‘new normal’ – empower people, propel businesses and stimulate the economy.

source https://www.thesundaily.my/business/marc-budget-deficit-could-rise-to-60-65-of-gdp-in-2020-FX2541502