KUALA LUMPUR – Fitch Ratings believes the government would advance subsidy rationalisation, likely to initially focus on electricity and diesel subsidies in the 2024 budget to be tabled in Parliament on October 13, following the status quo results seen in the recent state elections.
The state elections held on August 12 saw the union of Pakatan Harapan (PH) and Barisan Nasional (BN) retain power in Selangor, Penang, and Negri Sembilan, while the opposition Perikatan Nasional (PN) kept control of Kelantan, Terengganu, and Kedah with more than two-thirds majorities.
The rating agency said that the unity government led by Prime Minister Datuk Seri Anwar Ibrahim has already taken steps to reduce electricity subsidies for non-domestic users and high-voltage consumers, leaving the majority of households unaffected.
“Most food subsidies and the costly fuel subsidies have also been maintained in 2023. Broad removal of subsidies is expected to be unpopular, particularly as it might exert upward pressure on inflation in the near term,” it said in a statement today.
Nonetheless, Fitch noted that the election outcomes could encourage the government to prioritise other aspects of the Madani agenda, such as those focused on containing living costs, raising wage growth, and improving welfare.
“It has, for example, recently discussed plans to introduce guidelines for wage increases, albeit only on a voluntary and productivity-linked basis,” it said.
Meanwhile, Fitch opined that even if the authorities move ahead with some subsidy reforms as anticipated, officials might be more generous with offsetting assistance, as the government has some headroom to accommodate such spending.
According to Fitch, Malaysia’s revenue grew strongly over the first six months of 2023, rising 19.4% year-on-year (y-o-y), while expenditure rose by only 10.6% y-o-y.
“We believe the federal government deficit target of 5% of gross domestic product (GDP) for 2023 should be achievable, even with modest additional spending,” it said.
Fitch added that when it affirmed Malaysia’s rating at “BBB+”/Stable in February 2023, it assumed that the authorities would gradually reduce federal government deficits to around 4.5% of GDP in 2023-2025.
“We have since revised this to 4.3%, but our forecast is still wider than the 4.1% target that the government has laid out for the period in its Medium-Term Fiscal Framework for 2023-2025,” it said. – Bernama, August 15, 2023
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