Malaysia still faces fiscal constraints despite raising government debt ceiling, says Fitch Solutions

PETALING JAYA: In spite of the temporary raising of the government debt limit to 60% of gross domestic product (GDP), there is still binding fiscal constraints on Malaysia following stimulus spending to support the economy against Covid-19 headwinds, according to Fitch Solutions.

“While the government is unlikely to begin the process of paying its debt down in earnest in 2021, we note that the raised debt limit expires in 2022 and is likely to see constrained fiscal spending over the coming two years at least as the government endeavours to stay below the limit,” it said.

As such, it is maintaining its fiscal balance forecast at -6.1% for 2020, due to the heavy pressures that revenues will likely face due Covid-19’s impact on the economy and the government’s foregoing of revenues as part of its fiscal stimulus package.

Meanwhile, the same stimulus package also means expenditures are unlikely to fall as much as revenue, resulting in what is likely to be the largest fiscal deficit since 1987.

On Aug 24, Parliament passed legislation raising the government debt limit to 60% of GDP, from 55% previously. This law expires in 2022, at which point the limit is set to revert to 55% in the absence of an extension. This places Malaysia as having one of the highest debt limits in emerging Asia, along with Thailand, which also has a 60% government debt limit.

Fitch noted that with public debt at 59% of GDP, had the government not raised the limit, it would not have much space to borrow to counter any future negative shocks that may arise over the coming quarters, increasing Malaysia’s vulnerability.

“Our core view is for the government to maintain the debt limit at 60% over the coming two years at least, in the absence of another major negative shock. Indeed, the economy is likely to recover strongly in 2021, with the recovery likely to become more resilient once a rollout of mass vaccinations in achieved likely sometime later in 2021,” it said.

It is forecasting real GDP to expand by 6.3% in 2021, however, should another grave economic threat emerge next year, Fitch Solutions said its expects the government to raise the debt ceiling and borrow more to finance stimulus.

The research arm of Fitch Ratings also said it expects Bank Negara Malaysia (BNM) to act to relieve any pressure in the bond markets resulting from increased government borrowing, as it appears to have done in April.

“While total government debt is likely to remain elevated over the coming years, the burdens posed by interest repayments are likely to remain manageable with borrowing rates likely to be kept in check by the central bank,” it said.

Between March 31 and April 15, BNM sharply increased its holdings of MGS by 235%, to a total of RM9 billion. As of Aug 14, the total has reached RM10.7 billion which has likely helped to curb a spike in government borrowing costs.

source https://www.thesundaily.my/business/malaysia-still-faces-fiscal-constraints-despite-raising-government-debt-ceiling-says-fitch-solutions-HD3731485