Fitch Solutions says stimulus package insufficient for economic growth

Opalyn Mok
Interim Prime Minister Tun Mahathir Mohamad speaks during the economic stimulus package announcement at Perdana Putra building in Putrajaya February 27, 2020. — Picture by Shafwan Zaidon

GEORGE TOWN, Feb 28 — Fitch Solutions has revised its fiscal deficit forecast for Malaysia from 3.3 per cent of the Gross Domestic Product (GDP) to 3.9 per cent due to risks of lower government revenues.

The research unit attributed lower revenue to increased expenditure in the RM20 billion stimulus package, which is 1.3 per cent of the 2019 GDP, and the novel coronavirus (Covid-19) outbreak.

“While the stimulus package is unlikely to significantly worsen public finances overall, in the short term, the strategy of partly funding stimulus by reducing mandated retirement savings will likely have longer-term consequences for social security spending,” it said in a statement today.

However, Fitch Solutions maintained its 3.7 per cent GDP growth forecast for 2020, adding that there are also increasing downside risks due to the continuing spread of the Covid-19 outbreak as well as Malaysia’s deteriorating political outlook.

The group’s statement was in response to a stimulus package announced by Interim Prime Minister Tun Dr Mahathir Mohamad on February 27 to mitigate the impact of the Covid-19 outbreak.

“Given the increasing downside risks of a global Covid-19 pandemic and the pressure that will put on Malaysia’s economy, this stimulus package is in our view, unlikely to be sufficient to prop up growth by itself,” it said.

It also said the strategy employed to fund the additional outlays in the stimulus package poses long-term risks to the country’s public finances.

“Malaysia, lacking the strong fiscal reserves of the other economies that have announced stimulus packages prior, has opted to partly fund the stimulus by effectively lowering planned retirement savings in 2020,” it said.

It said the lowering of minimum employee contribution to the Employee Provident Fund (EPF) to seven per cent from the usual 11 per cent is projected to unlock RM10 billion worth of private consumption.

“Given the government’s relatively high debt load, including debt guaranteed by the government, of around 68 per cent of GDP (as of the end of 2018), it is likely that stimulus packages over the short- to medium-term would be funded by lower savings as well,” it said.

It believed that this strategy prevents a wider fiscal deficit from the stimulus package in the short term but warned that it could bring about longer-term fiscal risks arising from a greater need to spend on social security for retired Malaysians in the future.

It added that the political situation in Malaysia now poses risks to the government’s ability to implement the measures in the stimulus package.

It also expressed its view that the prospects of a stable government and political environment, even if a new government was to emerge, were dim and that intense politicking is likely to continue after that.

“We reiterate that this poses risks to Malaysia’s ability to counter the risks of a slowing economy made worse by the Covid-19 outbreak,” it said.

Putrajaya has been embroiled in a political quagmire since the collapse of the Pakatan federal government that was triggered by former prime minister Tun Dr Mahathir’s resignation on Monday.

The Conference of Rulers met today to look into the possibility of a new government or the dissolution of the Dewan Rakyat.

Yang di-Pertuan Agong Al-Sultan Abdullah Ri’ayatuddin Al-Mustafa Billah Shah, who had interviewed almost all MPs over the past two days, said he is yet to determine who commands the confidence of the majority of Parliament.

The Yang di-Pertuan Agong will be meeting with political party leaders again soon to obtain their nominations for the next Prime Minister.  

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