MARC says larger budget deficits justified

PETALING JAYA: Malaysian Rating Corporation Bhd (MARC), which expects the decline in overall government revenue and the increase in expenditures to lead to a budget deficit of 6% to 6.5% of gross domestic product (GDP) in 2020, believes that extraordinary times call for extraordinary measures and larger budget deficits are justified to ensure businesses and consumers are well supported.

“The critical question, however, is whether the deficits and debt can be pared down within the targeted time frame,” it said in a statement yesterday.

Increasing budget deficits and government debt will weigh on Malaysia’s sovereign credit rating. This is evidenced from the recent adjustments of Malaysia’s sovereign credit rating outlook from “stable” to “negative” by two international credit rating agencies.

“Going forward, however, we believe that a quick and sustainable recovery in global crude oil prices and credible medium-term revenue-enhancing measures will relieve some of the pressure.”

MARC has projected a contraction in Malaysia’s real gross domestic product (GDP) of between 3% and 1.5% in 2020. Apart from being dented by the deterioration in external trade, Malaysia’s growth pillar – private consumption – is set to moderate as consumer sentiment is affected by the rising jobless rate which recently hit a 30-year high.

Likewise, businesses have been deeply affected as reflected by the persistent deterioration in business conditions in the last six consecutive quarters.

With headline inflation already in negative territory, real interest rates remain higher than historical norms. Notwithstanding this, MARC foresees a slim possibility of further Overnight Policy Rate (OPR) cuts in 2020 after BNM reduced it to a historic low of 1.75% on Tuesday.

“We believe that further cuts in the OPR will add pressure on the banking sector’s performance and result in banks becoming extra cautious in their lending activity. It will also not augur well for the ringgit, which on a year-to-date basis has depreciated by 4.3% against the US dollar.”

For 2021, MARC maintains its real GDP growth forecast of 6.2-6.7% on account of the low base in 2020 as well as some recovery in private consumption and improvements in the external sector.

It expects global trade recovery to push up the Brent crude oil price to an average of US$50-US$55 per barrel in 2021. Studies have indicated that a US$1 rise in Brent’s price will increase Malaysia’s real GDP growth by about RM650 million and fiscal revenue by RM365 million, it added.

source https://www.thesundaily.my/business/marc-says-larger-budget-deficits-justified-YX2743144