Fitch: Malaysia Election Results Make Economic Policy Shift More Likely

The surprise victory of the opposition Pakatan Harapan (PH) coalition in Malaysia's general elections held on 9 May means a much higher likelihood of fiscal and economic policy change, said Fitch Ratings in a statement.

The PH won 113 of 222 parliamentary seats, resulting in Malaysia's first electoral transfer of power since independence in 1957.

While Fitch affirmed Malaysia's 'A-' rating with a Stable Outlook on March 28 and believed the election result was unlikely to lead to significant economic policy shift, the rating agency said he PH victory and its policy platform indicate a much greater potential for change as it includes proposals to roll back tax and subsidy reforms as part of a 100-day fiscal plan.

Among the most notable proposals is the replacement of the goods and services tax (GST) - a value-added tax launched in 2015 - with the narrower sales and services tax (SST) that had preceded it.

The GST has become a key source of government revenue, accounting for 18% of total revenue equivalent to just over 3% of GDP in 2017, said Fitch.

“By comparison, the SST accounted for only 8% of total revenue and 1.6% of GDP in its last year, 2014,” Fitch observed. “As such, absent offsetting measures, the replacement of the GST would result in a correspondingly higher deficit.”

Another significant element of the PH platform is a proposal to reinstate some of the fuel subsidies that were eliminated in 2015, according to Fitch.

Fuel subsidies accounted for around 1.7% of GDP in 2014 before they were rationalised, declining to 0.3% in 2015, the rating agency noted. “Therefore, if fuel subsidies are reinstated they could offset some potential budgetary gains from rising oil and commodity prices,” Fitch said.

Other notable PH platform policies include a review of government contingent liabilities and a Royal Commission of Inquiry to investigate recent corruption scandals, according to the rating agency.

“Reviewing contingent liabilities could limit the build-up of risks to broader public finances over the long term, though at the expense of creating some headwinds for domestic demand and growth,” said Fitch. “An inquiry into scandals could improve governance indicators over time, mitigating a key rating constraint for Malaysia.”