PETALING JAYA: MARC Ratings Bhd expects Bank Negara Malaysia’s (BNM) ongoing interest rate hike cycle to continue with the Overnight Policy Rate rising to 2.75% by the end of the year amid unprecedented global monetary tightening.
“BNM’s two consecutive 25-basis point hikes to 2.25% did not only signal improving economic conditions, but were also pre-emptive measures to brace Malaysia for external headwinds,” it said in a statement today.
MARC Ratings forecasts this year’s fiscal deficit at 6.0% to gross domestic product (GDP), which aligns with the government's projection. In 2021, Malaysia’s fiscal deficit rose to 6.4% of GDP from 6.2% in the previous year.
“In tandem with the rising fiscal deficit, total direct federal government debt rose to 63.4% of GDP in 2021 from 62.1% previously. Debt service charges have also surged past the administrative ceiling of 15% of revenue, which stood at 17.8% at end-2021. As such, we do not foresee the government introducing more stimulus packages to support the economy in 2022.
“It is worth pointing out that the federal government's operating expenditure/revenue ratio has been hovering near 99% since 2011. Thus, we think it is possible that the current federal government statutory debt ceiling – which has been lifted twice already, supposedly temporarily, first to 60% of GDP and then to 65% – could be lifted again soon to 70%. After all, the government expects statutory debt in 2022 – comprising Malaysian Government Securities, Malaysian Government Investment Issues and Malaysian Islamic Treasury Bills – to rise to 63.0% of GDP,” it added.
For 2022, the rating agency expects GDP growth, which will be driven mainly by private consumption, to come in at 5.5%, which is at the lower end of the government's forecast of 5.3-6.3%.
Given supply chain bottlenecks and shocks triggered by the Russia-Ukraine war, MARC Ratings projected this year's average pace of inflation will likely rise to 2.7%. Despite a narrowing policy space, the Malaysian government has been successful in lessening the possibility of a sovereign rating downgrade thus far.
“Moving forward, we believe that international credit rating agencies will monitor closely the deleterious economic impact can have on attitudes towards reforms, and consequently, the credibility and effectiveness of institutions and governance processes,” it said.
MARC Ratings said Malaysia's growth recovery momentum should continue as the economy reopens. Although the Russia-Ukraine war’s direct economic impact on Malaysia is small as trade and investments with these two countries are hardly significant, it believes that the conflict’s indirect impact, coupled with pressures from other major economies, is straining Malaysia’s fiscal position and policymaking.
Meanwhile, MARC Rating forecast Malaysia’s 2022 unemployment rate to average 4.0%, down from 4.6% in 2021. It said the pace of recovery of Malaysia's labour market has been sluggish. This is concerning because weak labour market recoveries are among the key causes of economic scarring, thus increasing the need for higher subsidies in 2022 to maintain social harmony.
