ArrowArtboardCreated with Sketch.Title ChevronCrossEye IconIcon FacebookIcon LinkedinShapeCreated with Sketch.Icon Mail ContactPath LayerIcon MailMenu BurgerPositive ArrowIcon PrintIcon SearchSite TitleTitle ChevronIcon Twitter
Nikkei Markets

Malaysia to strive to shield itself from credit rating cut

Falling crude price adds to government's challenges of keeping deficit in check

Malaysia relies heavily on oil shipments and counts on hefty annual dividend from state-run oil and gas explorer Petroliam Nasional, or Petronas to boost government income.   © AP

KUALA LUMPUR (Nikkei Markets) -- Malaysia is committed to stave off any potential credit rating downgrade as it strives to keep a lid on public expenditure, the finance minister said Wednesday, underscoring challenges for the new government that is facing a likely revenue squeeze amid falling crude price.

"We are relieved that so far we don't have any rating downgrade," Lim Guan Eng told reporters. "Of course we have to work very hard to ensure this will be maintained. We know it is very challenging because our fiscal deficit target has gone up and until we can rationalize our expenditure we have to continue to sacrifice those goodies that we are used to."

The government, which abandoned a plan to balance the budget by 2020 and now targets a fiscal deficit at 3.7% of gross domestic product this year - sharply wider than an initial estimate of 2.8% - assumed global crude price to range between $60 a barrel and $70 a barrel for 2019-2021.

"At the time the budget was prepared, we thought the price of oil will increase to $85 a barrel," Lim said. "And the price was around $72 per barrel at the time."

Brent crude price has declined to $65 a barrel since the Nov. 2 budget announcement.

Despite a decline in global crude price, the government has no plan to recalibrate the next year's budget targets, Lim said.

Malaysia, an oil exporting nation, relies heavily on oil shipments and counts on hefty annual dividend from state-run oil and gas explorer Petroliam Nasional, or Petronas to boost government income. Higher global crude prices, typically raises earnings prospect of Petronas, and potentially higher dividend pay-out.

The new Alliance of Hope coalition government, which inherited one trillion ringgit in debt and liabilities from the previous administration, plans to draw on special dividend of as much as 30 billion ringgit ($7.21 billion) from Petronas under the 2019 federal budget to pay outstanding refunds owed to taxpayers.

Last week, Moody's Investors Service cut its credit outlook on Petronas to Negative from Stable, while maintaining its A1 rating. The outlook could be revised back to Stable if more clarity on the company's dividend policy emerges along with the government's policy for the oil and gas sector, Moody's said.

Following the budget announcement, the global credit rating agencies kept their investment grade views on Malaysia, despite flagging risks to its fiscal and debt profiles.

Malaysia's ruling coalition which swept to power in a shock May election outcome, has scrapped an unpopular but remunerative goods and services tax to follow-through its pre-poll pledge. It now faces a 23 billion ringgit revenue shortfall despite replacing GST with a sales and services tax.

The government has formed a Tax Reform Committee to recommend ways to expand the tax base and help buoy its income. Ahead of the budget announcement, speculation over introduction of a wealth tax, capital gains tax and other levies had gained ground, as the government stepped up efforts to keep a lid on spending by cancelling several infrastructure projects and slashing costs at others, announcing pay cuts for ministers and terminating contracts of thousands of government staff who it says were political appointees. But on the budget day, Lim chose to tax only sugary drinks and didn't announce levies on rich Malaysians.

"The tax reform committee didn't advice the government to introduce the wealth tax, especially the capital gains tax and inheritance tax after receiving feedback from Bank Negara Malaysia, Securities Commission and Ministry of Finance," Lim told lawmakers in parliament. Moreover, revenue from such a potential levy won't be large enough to buoy government finances, he added.

--Sarah Nadlin Rohim

You have {{numberReadArticles}} FREE ARTICLE{{numberReadArticles-plural}} left this month

Subscribe to get unlimited access to all articles.

Get unlimited access
NAR site on phone, device, tablet

{{sentenceStarter}} {{numberReadArticles}} free article{{numberReadArticles-plural}} this month

Stay ahead with our exclusives on Asia; the most dynamic market in the world.

Benefit from in-depth journalism from trusted experts within Asia itself.

Try 3 months for $9

Offer ends September 30th

Your trial period has expired

You need a subscription to...

See all offers and subscribe

Your full access to the Nikkei Asian Review has expired

You need a subscription to:

See all offers
NAR on print phone, device, and tablet media