HURTING SALES: An attendant fills a customer’s car with petrol at a Royal Dutch Shell Plc gas station in Petaling Jaya. The fuel price increase will hurt sales at retailers as shoppers are more likely to stay home, said Raymond Teo, president of Malaysian Retailer Association. — Bloomberg photo
Malaysian Prime Minister Datuk Seri Najib Tun Razak returned to power this year with the help of a spending spree that boosted consumption. Now voters could feel the pinch as he tries to appease a different group: rating companies.
Najib’s government raised subsidized fuel prices for the first time since 2010 this month and has said it will delay some infrastructure projects, seeking to contain the budget gap and shore up the current account after Fitch Ratings cut Malaysia’s credit outlook to negative in July. It is also considering a goods and services tax in the 2014 fiscal plan due October 25.
The shift toward austerity could cool the domestic demand and investment that kept Malaysia’s gross domestic product rising an average six per cent in the three years through 2012.
The country joins Asian emerging markets such as Indonesia in confronting slower growth as they deal with the side effects of spurring local consumption, undermining the region’s role as the main driver of global expansion.
“It’s payback time,” said Santitarn Sathirathai, a Singapore-based economist at Credit Suisse Group AG, who cut Malaysia’s 2013 growth forecast to 4.4 per cent from five per cent this month.
“Current-account deterioration, fiscal balance deterioration, higher leverage, all these things are the price you have to pay” for boosting domestic demand, he said.
Along with rising national debt and a dwindling current-account surplus, Malaysians have also accumulated Southeast Asia’s highest level of household borrowings at 80.5 per cent of GDP, according to Bank of America Merrill Lynch.
The central bank in July imposed curbs including a shorter maximum tenure for mortgages, saying household indebtedness has expanded by an average of 12 percent per annum in the past five years.
The government’s spending restraint is aimed at maintaining confidence in Malaysia’s fiscal outlook as capital outflows from emerging markets deliver particular trauma to countries like India and Indonesia, which are grappling with current-account deficits and budgets burdened with subsidy costs.
The ringgit weakened about two per cent this quarter, among the worst performers in Asia. The country’s default risk rose above that of the Philippines for the first time this year.
At 53.3 per cent, Malaysia’s debt-to-GDP ratio is the highest among 13 emerging Asian markets after Sri Lanka, according to data compiled by Bloomberg. Fitch cited rising debt levels and a lack of budgetary reform when it cut the country’s rating outlook.
Moody’s Investors Service said this month the budget deficit may exceed four per cent of GDP this year, warning the government’s fiscal targets will become “increasingly out of reach” without additional measures to contain it.
The yield on Malaysia’s 10-year ringgit-denominated bonds reached 4.13 per cent on July 31, the highest level since January 2011, according to data compiled by Bloomberg. The rate has since declined 38 basis points, or 0.38 percentage point, to 3.758 per cent.
As the prospect of reduced US monetary stimulus fueled a selloff in emerging-market stocks and currencies in recent weeks, analysts at Barclays Plc last month recommended that investors hold underweight positions in Malaysian and Thai government debt.
Credit Suisse said the two are “most obvious potential candidates” to face stress in their external financing after India and Indonesia. — Bloomberg