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Malaysian Debts: Putting GDP at Risk

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The Malaysian fiscal deficit has been a concern although it has already consolidated after the general elections last May. Barclays economist summarised the economic trends in the succeeding discussions. Tax collections were slow versus overall targets despite the stronger economy. FX trading analysts are cautious on the fiscal deficit that is running even higher as compared to previous years. This puts pressure to the Malaysian government to protect the fiscal consolidation of not derailing.

Malaysian Ringgit

Goldman Sachs FX trading analysts forecasted the USD/MYR at 3.40, 3.30 and 3.20. This implied EUR/MYR at 4.69, 4.62 and 4.48 in 3, 6 and 12-months, respectively. The current FX valuation of USD/MYR by the broker is 2.67. According to the FX trading analysts, the Malaysian currency went under pressure in part by investor concerns on diminishing current account balance in the third quarter Balance of Payments print. Latest improvements in the trade balance will mitigate concerns of a more current account deterioration.

Government Budget

The government spent 63.5% of its 2013 budget in the first eight months of the fiscal year, one of the highest rates of disbursal since 2000. The fiscal deficit currently amounts to MYR25.1B, versus the government’s target of MYR40bn for 2013 which ate 4.0% of GDP. Barclays economists anticipate full year deficit to outpace the target by achieving MYR41.5B or 4.2% of GDP. It is the outcome of sluggish nominal GDP growth which weighed on tax collections. Nominal GDP growth is below real GDP growth attributed to the decline in palm oil prices in 2012. FX trading analysts reported that cash position of the government are still relatively strong. It borrowed MYR18.4B via issuance of debt in the eight months to August.

Fuel Subsidies

The Malaysian government announced large cuts in fuel subsidies subsidies to cut on spending while FX trading analysts expect more reductions in 2014. Economists as well perceive more moderation in the second and third quarter. The cut down in expenditures were due to development expenses. However, the build up in operational expenditures also relaxed. They do not see the supplementary budget announced will weigh on government spending. Government spending has only risen by 3%, which is above the aimed budget of 0.5% decline. The increase in spending has been due to increases in civil service salaries and larger grants, as the government has the goal to bolster its populairty prior to the elections.

Debt Servicing Forecasts

Barclays forecast Malaysia’s fiscal deficit to reach MYR41B or 3.8% of GDP. FX trading analysts are expecting an aggressive target of 3.5% of GDP. Debt servicing costs are still skyrocketing in 2014. As a result, the main deficit would be significantly lower on a 3.8% deficit target. They forecast public debt will climb to 55.5% of GDP by end of 2013 on weaker GDP growth. It will be sustained at 55.1% towards the end of 2014. The extent of government guaranteed debt is a key concern.

Meanwhile, the Malaysian government has indicated that it wished to reduce import-intensive ventures while rationalisation of subsidies were kept to identify the sovereign’s ratings trajectory in coming quarters.

Inflation

Goldman Sachs economists cut down its GDP forecasts for 2013 and 2014 to 4.6% Y/Y and 4.8% Y/Y from 5.1% Y/Y and 5.2% Y/Y respectively, on the back of a tightening in financial conditions and a slower than expected export recovery. On the back of the lower growth outlook, we have also reduced our inflation forecasts for 2013 and 2014 to 2.3% Y/Y and 2.4% Y/Y, from 2.6% Y/Y and 2.5% Y/Y, on the back of a more protracted closing of the output gap, and partly on the more muted inflation trends seen so far this year, supported by benign commodity prices seen in the earlier part of the year.

Monetary Policy

Bank Negara Malaysia maintained the Overnight Policy Rate unchanged at its latest meeting, in line with Goldman Sachs and consensus expectations. The broker have recently pushed back the timing of rate normalisation to second quarter of 2014 from first quarter of 2014, on the slower than expected growth outlook and the more muted inflationary trajectories that they had anticipated alongside the recent GDP and inflation forecast reductions.

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