KUALA LUMPUR: The new Malaysian government led by Prime Minister Datuk Seri Anwar Ibrahim will face obstacles to fiscal consolidation, Fitch Ratings said.
This is amid weakening external demand and public pressure to use subsidies to contain the rising cost of living.
Fitch said while the government's policy agenda remained unclear as yet, the fiscal deficit was expected to remain above four per cent of gross domestic product (GDP) in 2022-2024, given the more challenging economic outlook and spending promises made during the recent election campaign.
It said the selection of the new prime minister had relieved some near-term political uncertainty, but the government's position would remain fragile.
"A recently-introduced anti-hopping law inhibits individual members of parliament from switching parties, but allows for parties and blocs to collectively change their allegiance," it said.
Fitch said the new government's fiscal policy stance remained uncertain for now, but it believed that it would remain loose in the near term.
"The incoming government plans to review the broad but costly subsidy system. However, the likely shift to a more targeted regime will be gradual, given that subsidies have helped to contain inflation – we forecast it to average a relatively low 3.4 per cent in 2022.
"In addition, the PH's campaign promises point to higher spending on healthcare, housing, education and infrastructure," it added.
Nonetheless, Fitch said fiscal consolidation would get a boost in the near term from stronger GDP growth.
Fitch revised its forecast for 2022 economic growth to 7.8 per cent, from 6.5 per cent previously, after the strong outturns in the second quarter (Q2) and Q3 2022.
It also revised its growth forecast in 2023 to 3.5 per cent from 4.3 per cent given the stronger base effect and challenging external environment.
"When we affirmed Malaysia's ratings at 'BBB+' with a Stable Outlook in February 2022, we stated that a material reduction in the government debt ratio over the medium term could lead to positive rating action, while an increase could prompt negative action," it said.
