Bangkok--10 Oct--Standard & Poor's
Malaysia's budget for 2012 is not likely to improve the country's credit quality significantly, despite some fiscal consolidation because of the still moderately high level of deficit, said Standard & Poor's Ratings Services today, after the budget announcement.
Malaysia's 2012 budget, as widely expected, is aimed at buffering against the uncertain global macroeconomic and financial environments. It also appears to be a 'people-focused' budget, against the backdrop of the general election, which must be held by 2013. In the spirit of 'People First', the government will continue all subsidies, incentives, and assistance totaling Malaysian ringgit (MYR) 33.2 billion. This amount is 60% more than the expected total size of subsidies for fiscal 2011, as the deputy prime minster mentioned in May 2011.
The total size of the budget is MYR232.8 billion, of which MYR181.6 billion is toward current expenditure and MYR51.2 billion is for development expenditure. MYR29.8 billion of the development expenditure is for investment in infrastructure, and industrial and rural development. On the other hand, MYR13.6 billion is allocated for the social sector, including education and training, welfare, and housing and community development.
"In our view, the new budget makes some progress in fiscal consolidation but the level of fiscal deficit is still not healthy enough to maintain in the medium term," said Standard & Poor's credit analyst Takahira Ogawa. The government targets a fiscal deficit of 4.7% of GDP for 2012 against the revised government estimate of 5.4% this year. Higher revenues, particularly petroleum-related revenues, and slower disbursement of some of the expenditure items for the first seven months of this year resulted only in MYR1.6 billion in deficit being recorded until July, against MYR43 billion budgeted for the whole year. However, the government kept the estimate of the ratio of fiscal deficit to GDP for 2011 the same as in the budget for 2011, with the view to accelerate the disbursement of public funds later this year.
"The introduction of the Goods and Services Tax (GST) and structural reforms of the country's large subsidy system were not included in the budget. In our view, those measures would have been politically sensitive ahead of the general election," said Mr. Ogawa.
On the other hand, the government announced a series of measures to alleviate rising prices, which hit the lower- to middle-income groups hard. From 2012, the government will abolish tuition fees for primary and secondary education. It announced an increase in the salaries and pensions of civil servants and introduced the single-tier pay scale for civil servants. This pay scale increases the maximum salary in the same grade for civil servants and enables them to receive annual increments over a longer period; this is the first time in 21 years that the size of the increment has been increased. The government also announced the extension of the mandatory retirement age of civil servants to 60 years from 58 years. The upper limit of the housing price was increased to MYR400,000 from MYR220,000 to be eligible for the 'My First House' special low-interest mortgage scheme. In addition, budgets for upgrading hospitals, better medical services, enhancement of social welfare programs, financial support for start-ups, and packages for small and midsize enterprises were also announced.
The government also announced a rural transformation scheme, which includes a budget of MYR5 billion for investment in basic infrastructure. The government will separately announce the programs to supply clean water in rural areas, particularly in Sabah and Sarawak. The government provided 20,000 water tanks in this region as an immediate measure, and has additional budget for more in 2012. The government will also provide MYR400 million to improve the situation in the northern states of peninsular Malaysia.
As the moderately high levels of fiscal deficit and government debt outstanding are the most significant negative factors for the sovereign ratings on Malaysia (foreign currency A-/Stable/A-2; local currency A/Stable/A-1; ASEAN scale axAA+/axA-1), we will continue to focus on the development of macroeconomic growth and the prospects of fiscal consolidation and structural reforms in the next few years.
Media Contact:
Mimi Barker, New York (1) 212-438-5054,
[email protected]
Analyst Contacts:
Takahira Ogawa, Singapore (65) 6239-6342
Kyran Curry, Melbourne (61) 3-9631-2082