Bangkok--18 Oct--Standard & Poor's
Standard & Poor's Ratings Services said today that its ratings and outlook on Malaysia (foreign currency A-/Stable/A-2, local currency A+/Stable/A-1) are unaffected by the budget speech for 2011 given earlier today by Prime Minister (and Finance Minister) Datuk Seri Najib Razak. In our view, Malaysia's budget for 2011 will not improve the country's credit quality significantly because of the announced slow pace of fiscal consolidation.
The 2011 budget contains various measures to widen the level of benefits and tax exemptions or discounts, which we believe would be difficult to reduce or reverse in future. An increasing debt burden relative to the size of the economy is one of the negative factors currently weighing on the sovereign ratings on Malaysia. We think net general government debt could reach about 34.7% of GDP at the end of 2010, which is higher than the 28.4% median of the 'A' rating category.
In our opinion, the government appears mindful of maintaining growth in the economy because of the uncertainty surrounding next year's global economic outlook. However, if the fiscal structure for government revenues and expenditures remains unaddressed in the near future, we believe it will be more difficult to improve fiscal flexibility and broaden the tax base over the medium to long term, which would constrain the level of Malaysia's sovereign credit rating.
Contrary to market expectations, the 2011 budget aims to generally maintain the level of fiscal deficit, which reached 7% of GDP in 2009 because of the sharp global economic slowdown. The deficit is budgeted at 5.4% of GDP in 2011, compared with the government forecast of 5.6% for 2010. As a result, the fiscal consolidation required to reduce the deficit to 3% of GDP by 2015, based on the10th Malaysia Plan for 2011-2015, will be back-loaded.
On the revenues side, there was no announcement on the timeline for the introduction of the Goods and Services Tax, which the government postponed earlier this year. There was also no major reduction in corporate and personal income taxes. (The government had cut the corporate tax rate by 1 percentage point in the 2010 budget.) However, the service tax rate was increased to 6% from 5%. Property gains tax, meanwhile, remains unchanged at 5% for properties sold within five years of purchase. Instead, the upper limit of the 50% discount on stamp duty for the transfer of ownership of residential property has been increased to Malaysian Ringgit (MYR) 350,000 from MYR250,000.
On the expenditures side, while operational expenditures will increase by 7%, capital expenditures will be 9% lower than this year's budget. The total reduction in subsidies announced in the 2011 budget statement amounts to MYR1 billion.
Overall, given the contents of the 2011 budget, we think there is a possibility of a snap election in 2011, although the Malaysian government has until March 2013 to call an election. In our opinion, major reforms for government revenues and expenditures could be pushed back until after the next election, when the Prime Minister would have a new mandate.
Media Contact:
Jeff Sexton, New York (1) 212.438.3448,
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Analyst Contacts:
Takahira Ogawa, Singapore (65) 6239-6342
Agost Benard, Singapore (65) 6239-6347
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