Malaysian govt spending necessary though it leads to near doubling of fiscal deficit: Economist

Azlee Nor Mahmud

KUALA LUMPUR (BERNAMA) – The Malaysian government expenditure for this year will likely cause the fiscal deficit to widen to almost double that recorded in 2019, but this is deemed necessary because the current economic indicators point towards a possible recession by year-end, said an economist.

Putra Business School senior lecturer and manager for business development, Professor Dr Ahmed Razman Abdul Latiff, said some of the indicators such as unemployment rate and gross domestic product (GDP) growth were not encouraging and could even worsen, thus requiring immediate intervention by the government.

 “The introduction of PRIHATIN economic stimulus package and the National Economic Recovery Plan (PENJANA) is testimony to the government’s full commitment to address this economic slowdown in order to mitigate the negative impacts on the people and businesses.

“The government is committed to spending billions of ringgit under the PRIHATIN and PENJANA packages. The next step is to secure sources of funding by obtaining borrowings, which will increase the fiscal deficit.

“That is the reality, as limited options for funding are available particularly amid COVID-19,” he told Bernama. On the advantages of raising debt through domestic borrowings, Ahmed Razman said there would be protection against fluctuations in foreign currency exchange rates.

As an example, he cited the Malaysian government’s issuance of Samurai bonds worth JPY200 billion yen (then MYR7.4 billion) with a coupon rate of 0.63 per cent per annum early last year.

“Although the interest rate is low, we will end up paying more and more every year if the yen appreciates drastically against the ringgit in the next few years. With domestic borrowings, there would be no such risk,” he said.

On the government’s aim to narrow the fiscal deficit to less than four per cent of the GDP over the next three years, Ahmed Razman said it was achievable given that Malaysia had recorded fiscal deficits of less than four per cent for the past six years.

“When the fiscal deficit was 6.7 per cent in 2009, we managed to reduce it to less than 4.0 per cent in 2013. I am confident that with a projected fiscal deficit of six per cent for this year, we can reduce it to less than four per cent by 2023, provided there is no major economic crisis affecting the Asian region or the world for the next few years,” he said.

Ahmed Razman said a couple of months ago, the International Monetary Fund (IMF) mentioned that Malaysia had a capacity to borrow up to 70 per cent of the GDP.

“Several ASEAN countries have higher percentages than Malaysia such as Singapore (126 per cent), Vietnam (57.5 per cent), Laos (53.34 per cent). If we look at the Asian countries, Japan has the highest percentage (238 per cent),” he noted.