The 2015 budget unveiled by Malaysia on 10 October is broadly positive for the country's A3 sovereign rating, which is at the lower end of the credit-rating agency's Prime 1 ratings. While investment-grade, the A3 rating is six rungs below the top Aaa rating.
Moody's highlights the federal government's target of bringing down the federal government deficit to 3% of GDP next year, half of the 6.7% ratio in 2009. "It is also in line with the government's target to balance its books by 2020," the credit rating agency notes.
Part of the headline items is the introduction of a 6% Goods and Services Tax (GST) on 1 April 2015, which replaces the sales and services tax, and a 7.1% decrease in fuel subsidies.
"The implementation of GST . . . eases the government's reliance on petroleum-related income," says Moody's, noting that such income is projected to account for 25.6% of total revenue in 2015, from 35% in 2011. "In addition, the diversification of revenue provided by the GST mitigates risks to income related to oil price volatility."
The budget assumes an average price of US$105 per barrel of crude oil, compared with the current price of US$90. Moody's expects oil prices to remain below US$100 next year. "Lower oil prices could further accelerate gain in reducing the subsidy bill," reckons.
But the government is mindful of the political repercussions of the subsidy cuts and the GST, so it has exapaned the list of items exempted from GST to include many basic food items, medicines, electricity consumption below a certain threshold, and subsidized fuel.
"Offsetting measures to preserve consumers' purchasing power somewhat blunt the effectiveness of the subsidy refomrs and the introduction of the GST because they lead to an erosion of revenue," warns Moody's.
The government is also expanding benefits for poorer households and is cutting individual tax rates from 2015, and corporate income tax rates from 2016.
It remains to be seen whether what the government gives back totally negates what it is taking away, or if the concessions are small enough to still result in net gains in terms of a healthier fiscal position and more sustainable sources of revenue.