Malaysia's economic stimulus package unlikely to affect S&P Global Ratings’ outlook

Malaysia's economic stimulus package announced on Thursday is unlikely to materially affect S&P Global Ratings' outlook on the country's fiscal performance and has a limited impact on the sovereign credit ratings.

The Ministry of Finance estimates Malaysia's fiscal deficit will rise modestly to 3.4% of GDP in 2020 following the Malaysian ringgit (MYR) 20 billion package, which is equivalent to about 1.2% of GDP. This compares with the previous target of 3.2%.

The relatively small upward revision is because many of the measures will not directly add to government spending or reduce revenue. The measures are also temporary and should not structurally weaken the government's finances, S&P Global Ratings reported.

The Malaysian government's fiscal position has weakened in recent years, with net debt rising to about 58% of GDP at the end of 2019, from less than 50% in 2016. Fiscal flexibility has also been constrained by tax reductions that contributed to a decline in the government's revenue to about 18% of GDP in 2019, from more than 20% before 2016.

Consequently, a structural weakening of the government's financial position or a sustained weakening of economic performance could undermine support for the sovereign credit rating on Malaysia (foreign currency A-/Stable/A-2; local currency A/Stable/A-1).

Malaysia's fiscal stimulus program follows new budgetary measures by neighbouring countries, including Hong Kong and Singapore. The package should support the most vulnerable segments in Malaysia in the face of challenges the economy faces this year.

The cost of some key components of the program, including a planned allocation of MYR2 billion toward small infrastructure projects across the country, will likely be borne directly by the government.

Cash incentives for individuals most directly affected by the outbreak of COVID-19 (caused by the novel coronavirus) and special allowances for affected civil servants are also likely to add to government expenditure.

However, most of the measures proposed do not entail direct costs to the government. These include the optional reduction of the Employees' Provident Fund (EPF) contribution by employees for eight months beginning April 2020, which could sum to MYR10 billion, and has been accounted for as part of the total size of the stimulus package.

Similarly, the restructuring and rescheduling of loans for businesses and individuals should not directly affect the government's fiscal position.

Meanwhile, Malaysia's ongoing political impasse (with the collapse of the Pakatan Harapan government) could undermine the timely implementation of these fiscal support measures. The country's broader economic outlook could also weaken if significant uncertainty over the formation of the new government continues for long, the report further added.