KUALA LUMPUR (Feb 28): Malaysia’s broader economic outlook could weaken if significant uncertainty over the formation of the new government continues for long, said S&P Global Ratings.

In a statement today, S&P said the country’s political impasse (with the collapse of the Pakatan Harapan government) could undermine the timely implementation of fiscal support measures.

Commenting on the Stimulus Package 2020, S&P said the package is unlikely to materially affect the ratings agency’s outlook on the country's fiscal performance and has a limited impact on the sovereign credit ratings.

S&P said the Ministry of Finance estimates Malaysia's fiscal deficit will rise modestly to 3.4% of gross domestic product (GDP) in 2020 following the RM20 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,” it said.

S&P said 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.

It explained that 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),” it said.

S&P said Malaysia's fiscal stimulus programme follows new budgetary measures by neighbouring countries, including Hong Kong and Singapore.

It said the package should support the most vulnerable segments in Malaysia in light of challenges the economy faces this year.

S&P said the cost of some key components of the programme, including a planned allocation of RM2 billion towards small infrastructure projects across the country, will likely be borne directly by the government.

It said cash incentives for individuals most directly affected by the outbreak of Covid-19 and special allowances for affected civil servants are also likely to add to government expenditure.

However, it pointed out that 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 RM10 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,” it said.

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