Aug. 1 (Bloomberg) -- Malaysian Prime Minister Najib Razak said he’ll announced steps in his budget speech later this year to tackle risks to the fiscal position outlined by Fitch Ratings.
Fitch cut its outlook to negative from stable this week, citing the Southeast Asian nation’s rising debt levels and lack of budgetary reform. The credit rating company’s concerns are shared by the government, Najib told reporters at an Islamic finance event in Kuala Lumpur today, without giving details of fiscal measures planned for his October 25 budget address.
“We are just looking at various policy options but we do understand that there’s a need for us to strengthen the fiscal and macro position of the government,” he said. “The actual details will be unveiled shortly, particularly in the forthcoming budget.”
Najib, who is also finance minister, led his Barisan Nasional coalition to victory in Malaysia’s general election in May following a spending spree which saw him raise civil servants’ salaries and give cash handouts to the poor. He also froze planned cuts in state subsidies on essential items and stalled on introducing a goods and services tax.
“It’s important for us to reduce our vulnerabilities and one of the areas is in the fiscal area,” central bank Governor Zeti Akhtar Aziz told reporters at the same event. “Malaysia has the capacity and capability to address it in a gradual and sequent manner.”
Malaysia remains committed to trimming the deficit to 3 percent of gross domestic product by 2015 and won’t let state debt exceed 55 percent of GDP, the government said in an e-mailed statement yesterday. It still plans to reduce subsidies and broaden the tax base, it said.
The deficit is forecast to narrow to 4 percent of GDP this year from 4.5 percent at the end of 2012, according to the central bank’s annual report in March.
The FTSE Bursa Malaysia KLCI Index fell 1.3 percent yesterday, the most in seven weeks, the ringgit slumped to a three-year low and 10-year bond yields climbed to the highest since January 2011 after Fitch cut its outlook July 30. Stocks and the ringgit climbed today, while bonds were little changed.
The selloff was a “knee-jerk” reaction and investors should take this opportunity to accumulate positions, CIMB Group Holdings Bhd. analysts Terence Wong and Lee Heng Guie wrote in a report today, standing by their prediction that the KLCI will rally to 1,850 by year-end. The gauge closed at a record on July 24 and has climbed 5.3 percent this year.
“The average lifespan for a rating outlook is about 18 to 24 months before a downgrade is enforced, giving Malaysia time to prevent that,” they said. “The rating watch outlook is a warning for Malaysia to improve its macroeconomic management and the government has time to get its house in order.”
Malaysia’s public finances are its key rating weakness, Fitch said. Rising state subsidies pose risks and it would be difficult for the government to achieve its 2015 deficit target without additional steps, the company said.
The economy is projected to grow between 5 percent and 6 percent this year after expanding 5.6 percent in 2012, according to the central bank. Growth may moderate in 2013 and next year on external factors, Najib said today.
To contact the editor responsible for this story: Shamim Adam in Singapore at email@example.com