The international rating agency said on Monday the move is credit positive for the sovereign as it will help reduce the government’s subsidy bill and contribute to its fiscal consolidation.
“However, further reforms will be necessary if the government is to meet its goal of achieving a balanced budget by 2020,” it said in a statement.
“The price increases mark the latest attempt by Prime Minister Datuk Seri Najib Tun Razak’s government to rein in the fiscal deficit, which we forecast will narrow to 3.1% of GDP this year from 3.9% in 2013 and below the official target of 3.5%.
“The hike of 20 sen per litre, which constitutes a 9.5% increase for gasoline and a 10% rise for diesel, mirrors the government’s September 2013 reduction in fuel subsidies, and is in line with the government’s policy to make subsidy rationalization a key part of its fiscal consolidation efforts,” it said.
Mooody’s also pointed out The government has also cut subsidies for other items, including sugar and electricity, and will introduce a 6% goods-and-services tax in April 2015 to broaden the tax base and ease the government’s reliance on petroleum-related income.
Malaysia’s overall subsidy bill has grown rapidly over the past decade, in line with the rise in oil prices.
Subsidy reductions over the past year have caused subsidy spending as a share of the government’s operating expenditures to fall to 17% for the first half of this year after peaking at more than 20% in 2011 and 2012 from the 2009 level of 13%.
However, Moody’s pointed out Malaysia’s public debt stock was 54.7% of GDP at the end of 2013, higher than the A-rated peer median of 41.4%.
“But combined with our expectations of stronger real GDP growth this year of 6.0%, up from 4.7% in 2013, smaller fiscal shortfalls should chip away at the debt stock. That would give the government greater room for manoeuvre beneath its self-imposed debt ceiling of 55% of GDP,” it said.
Moody’s also explained its expectations of fiscal consolidation and reform and macroeconomic stability were key drivers behind its decision in November 2013 to change Malaysia’s rating outlook to positive from stable.
“These factors would also be important for any upgrade in the rating. The next fiscal test for Malaysia will come when the government presents its Budget 2015 on Friday (Oct 10).
“The administration has said that it will target a deficit of 3.0% of GDP next year, and we think that it will roll out further fiscal consolidation measures to achieve that goal,” it said.