The PH-led government plans to review the broad but costly subsidy system. (Bernama pic)
PETALING JAYA: The new Malaysian government led by Pakatan Harapan’s (PH) Anwar Ibrahim will face obstacles to fiscal consolidation amid weakening external demand and public pressure to use subsidies to contain the rising cost of living, says Fitch Ratings.
The government’s policy agenda remains unclear as yet, but we expect federal government deficits to remain above 4% of GDP in 2022-2024, given the more challenging economic outlook and spending promises made during the recent election campaign.
The selection of the new prime minister relieves some near-term political uncertainty, but the government’s position will remain fragile.
PH has 82 seats in the 222-member parliament. There have been indications that it will receive support from the United Malays National Organisation (Umno), which leads the Barisan Nasional (BN) bloc that has 30 seats, but it is not clear how robust this support will be.
A recently introduced anti-hopping law inhibits individual members of parliament from switching parties, but allows for parties and blocs to collectively change their allegiance. Other parties, including the Gabungan Parti Sarawak (GPS) and Gabungan Rakyat Sabah (GRS), have also indicated support for the PH coalition, which could improve prospects for political stability
The new government has indicated it will shortly table a revised 2023 budget. Its fiscal policy stance remains uncertain for now, but we believe it will remain loose in the near term.
All three of Malaysia’s main political blocs (PH, BN and the Perikatan Nasional-PN) promised during the campaign to ease cost of living burdens.
The incoming government plans to review the broad but costly subsidy system. However, the likely shift to a more targeted regime will be gradual, given that subsidies have helped to contain inflation – we forecast it to average a relatively low 3.4% in 2022.
In addition, the PH’s campaign promises point to higher spending on healthcare, housing, education and infrastructure.
The PH election manifesto also called for reviews of revenue sharing and decentralisation of power to the regions of Sabah and Sarawak. This process might have implications for federal government finance.
In 2018, a PH-backed coalition removed the Goods and Services Tax (GST), adopting a narrower Sales and Service Tax. We view the probability that the new government will implement measures that sharply lift revenues, such as a reintroduced GST, as low.
Nonetheless, fiscal consolidation will get a boost in the near term from stronger GDP growth. We have revised our forecast for 2022 economic growth to 7.8%, from 6.5% previously, after the strong outturns in Q2 2022 and Q3 2022.
However, the stronger base effect and challenging external environment mean that we have revised our forecast for growth in 2023 to 3.5% from 4.3%
When we affirmed Malaysia’s ratings at ‘BBB+’ with a Stable Outlook in February 2022, we stated that a material reduction in the government debt ratio over the medium term could lead to positive rating action, while an increase could prompt negative action.
Governance standards are another important sensitivity for Malaysia’s rating. Multiple changes in government since 2018 have not prevented the implementation of budgets and other policies, possibly reflecting the underlying strength of Malaysia’s institutions.
However, they have decreased visibility over the long-term direction of policy, and there is a risk that government effectiveness could weaken if political volatility is sustained.
The PH manifesto commits to combating corruption and strengthening governance, but the dynamics of coalition government may reduce the potential for major reforms.
Moreover, it could take time to assess the impact of any changes.
