RAM Ratings’ gA2 sovereign rating of Malaysia is expected to remain intact following the recent election victory of Pakatan Harapan (PH). We anticipate some economic and fiscal policy changes, which introduce uncertainties in the near term, as details are scant at this juncture. However, the strong emphasis by the new leadership on governance and institutional reforms is a long-term positive for the nation’s fundamentals.
RAM views Malaysia’s sound macroeconomic fundamentals as a key driver of a sustainable growth momentum and a central factor underpinning its rating going forward. Nevertheless, there could be some potential transitory downside risks during the next 100 days leading up to PH’s formation of a new government and as the ironing out of implementation details of major campaign promises take place. As such, RAM maintains its current GDP forecast for 2018 at 5.2%. We are monitoring developments, especially from the newly established Council of Eminent Persons, which is expected to shape most of the economic reform and maintain financial stability in this stage of transition.
Major reforms and policy changes are envisaged to be on the cards, of which the removal of the Goods and Services Tax (GST) is one of the most prominent, given the potential loss of part of the RM 44 billion in GST revenues projected for 2018. There are several ways in which this revenue shortfall could be plugged. These include the re-introduction of the previous Sales and Services Tax (SST) in some form, the windfall from the higher than budgeted oil prices and the temporary cessation of some large government-linked projects while they are under review. The timeline for the execution of these changes and their scope will determine how fiscal deficit management is followed through. Although no concrete plans have been announced, from our analysis, there are several avenues to rationalise expenditures in order to maintain fiscal prudence. The other aspect of the equation that we will be monitoring is new revenue-boosting measures that will also be required for fiscal consolidation to be sustained going forward.
Much of the downside risk to GDP growth will fall on investment momentum which is seen to be two-fold: (1) from a slowdown in infrastructure investment implementation rates on the back of the government’s review of contracts with foreign participation; and (2) from market uncertainties which will dampen capacity-building activities in the near term. This will, in our view, put some downward pressure on our current private investment projection of 8.0% for this year, although we are still monitoring how expedient this process will be to get things back on track. The review and potential re-opening of government contracts to another round of open tenders could have an extended dampening effect on projects which are already underway.
On the flipside, a number of PH’s ‘10 promises for the first 100 days’ are very supportive of private consumption activities and, as such, provide some potential upside to our current private consumption growth projection of 7.2% for 2018. Again, the realisation of the consumption boost will depend heavily on how fast current policies can be changed and new ones administered, such as the GST and re-introduction of the SST – the form this will take is another aspect to consider in terms of its scope in respect of government revenue and consumption boost. In the same vein, inflation could come in lower than our projected 2.3% this year on account of the narrower indirect tax reach and reintroduction of fuel subsidies, albeit targeted. The extent of the downward pressure on prices will hinge once again on the policy details, i.e. the extent of subsidy support and at what level prices will be capped.
Some short-term uncertainties could cloud business sentiment and financial markets as policy details are formulated. In our view, any volatility in the bond market is mitigated by the deep domestic institutional investor base. We expect corporate bond issuance to slow looking ahead, especially from the quasi-government space as the government re-assesses its contingent liabilities. That said, on account of the better than expected corporate bond issuance of RM 42.1 billion so far this year as at end-April, RAM will maintain its gross corporate bond issuance projection of RM 90-100 billion for 2018.
Some of PH’s election pledges could have an impact on certain corporate sectors, some of which are major bond issuers. The review of large infrastructure projects and the abolition of tolls on expressways under government concessions could impact some construction players and toll road projects. RAM will release its preliminary analysis on the affected sectors as more details become available.
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