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The Star
12-05-2025
- Business
- The Star
Low impact on M'sia's credit rating
PETALING JAYA: Despite the imposition of US tariffs, Malaysia's fiscal consolidation initiatives will not be fully derailed and negatively affect its sovereign credit rating. Economists said that the imposition of US tariffs could see some slowdown in the country's economic growth for 2025, but this would not significantly affect the government's fiscal consolidation exercise. Fiscal consolidation refers to government policies aimed at reducing deficits and debt accumulation. It involves measures to balance government revenue with expenditure, minimising deficits, controlling public debt and promoting sustainable economic growth. A sovereign credit rating is a score assigned by a credit rating agency to a country, reflecting its ability and willingness to repay its debt obligations. It's an assessment of a nation's creditworthiness. Malaysia's sovereign credit rating is currently A3 with a stable outlook by Moody's. Fitch Ratings also affirmed Malaysia's sovereign rating at BBB+ with a stable outlook, while S&P Global Ratings affirmed Malaysia at A- with a stable outlook. MARC Ratings has affirmed Malaysia's sovereign rating at AAA with a stable outlook. Bloomberg recently reported Moody's Investors Service as citing that the US tariff shocks, among others, could pose a major threat to Malaysia's sovereign credit rating due to the potential disruption to economic growth and fiscal consolidation. The ratings firm sees downside risks to its initial projection of 5% growth for Malaysia this year due to exposure to global trade tensions. There's also a possibility that the government increases spending to counter headwinds from US-imposed levies, said Christian De Guzman, senior vice-president at Moody's in an interview with the wire agency. De Guzman also noted that Malaysia may delay or postpone the petrol subsidy re-targeting, referring to the government's plans to end blanket subsidies for its most popular gasoline by mid-year. 'The risks to fiscal consolidation are there,' he said. On April 2, the US government launched baseline tariffs of 10% on all imports to the United States and reciprocal tariffs on trade partners on April 9. Malaysia was levied with a 24% reciprocal tariff. Shortly after that, the United States announced it would impose a 10% tariff for 90 days on more than 75 countries that were willing to negotiate with the United States. Negotiations during the tariff pause would decide whether tariffs on Malaysia would be lifted, maintained at 24% or reduced. RAM Rating Services Bhd economist Nadia Mazlan RAM Rating Services Bhd economist Nadia Mazlan said the various stimulus measures introduced by the government to help soften the blow to Malaysia's economic growth from the US tariffs would unlikely fully derail the country's fiscal consolidation initiatives and fiscal discipline. This is because narrowing the fiscal deficit is seen to remain a priority for the government in the medium term, she noted. 'The government will likely continue to adjust its future spending to work towards achieving the 3% fiscal deficit target by end-2028,' she said. Nadia said the government has introduced stimulus measures for the domestic economy and will likely implement more in the event US tariffs severely pressure economic activity. To counter the impact thus far, she said the government has announced that it would provide RM1.5bil worth of new guarantees and financing for affected small and medium enterprises as well as to fund efforts to diversify exports through the Malaysia External Trade Development Corp. Other fiscal measures such as cash transfers may be next on the list if risks to economic growth rise and would likely be targeted towards vulnerable sectors and groups, she noted. 'The additional spending from these fiscal stimuli could mean that the government will exceed its budgeted expenditure amount this year, which may result in a small setback in Malaysia's fiscal consolidation trajectory. 'We do not discount the possibility that the government may allow the fiscal deficit to be slightly off-target this year (Budget 2025 target: 3.8% of gross domestic product (GDP); 2024: 4.1% of GDP), in order to fund the extra stimulus needed to counter the negative impact from US tariffs. 'Additionally, slower economic growth reduces nominal GDP, which represents the denominator of the ratio, making it harder to lower the fiscal deficit ratio,' Nadia said. MARC Ratings Bhd chief economist Ray Choy MARC Ratings Bhd chief economist Ray Choy said fiscal consolidation efforts remain in progress, though not without its challenges. One critical factor shaping the pace of reform is the phased development of an integrated beneficiary database, essential for executing subsidy re-targeting with precision and social legitimacy. 'While the timeline has shifted, the delay may be viewed constructively as a reflection of the government's intention to safeguard household welfare amid a deteriorating global economic outlook. 'This measured approach underscores a pragmatic balancing of fiscal rectitude and political economy constraints,' he noted. He said furthermore, Malaysia's fiscal and macroeconomic policy would need to adjust to a more subdued external environment. Of particular relevance is the calibration of fuel subsidy retargeting, he said. Slower than anticipated growth, alongside a sharper than expected decline in global oil prices, with Brent now trading below US$65 per barrel, alters the policy calculus. 'While lower oil prices ease the fiscal burden of maintaining subsidies, they also dampen petroleum-related revenues, introducing competing pressures. 'Still, the current environment offers a window of flexibility: Reduced subsidy expenditure creates space to implement reforms more gradually, cushioning the impact on households. 'At the same time, the revenue constraint could serve as a constructive impetus for the government to accelerate consideration of alternative fiscal measures and move toward a broader, more resilient revenue base. 'In short, trade-induced volatility may delay subsidy rationalisation at the margin but also reinforces the imperative of longer-term fiscal consolidation,' Choy said. Juwai IQI global chief economist Shan Saeed Unperturbed by Moody's caution that the US tariff shocks, among others, could pose a major threat to Malaysia's sovereign credit and fiscal consolidation, Juwai IQI global chief economist Shan Saeed said the government has the economic tools to maintain macroeconomic stability. 'The Malaysian government can still use the amalgamation of fiscal and monetary policies to keep the economic growth trajectory moving at the macro level. 'Malaysia can still manoeuvre strategically within the trade and commerce landscape and can handle the tariff pressure by diversifying into other regions of the global economy. 'It depends on the government decision after analysing the key variables in the global economy like tariff talks outcomes, revenue stream in the current fiscal year, geopolitical risk, inflation numbers, interest rates outlook and regional financial markets,' he said. Furthermore, he said the government could focus on expanding the GDP size of the country, increase aggregate demand and most importantly, provide confidence to local investors. 'Once the GDP improves, it will enhance the revenue base, and the government will be able to collect more revenues. We expect GDP to still meander around 5 to 6% in the current fiscal year and the ringgit to hover between RM4.10 and RM4.30 against the US dollar,' Shan said. OCBC Senior Asean economist Lavanya Venkateswaran On whether the Malaysian government may increase spending to counter headwinds from US-imposed levies and the risk to fiscal consolidation initiative, OCBC Senior Asean economist Lavanya Venkateswaran said it does make sense to adopt counter-cyclical monetary and fiscal policies to support economic growth, particularly if the reciprocal tariff is implemented. More targeted fiscal spending to support impacted business and tax relief measures could be introduced, she said. 'The challenge for the moment is that uncertainties remain elevated. It is not clear whether the United States is ready to make deals with Asian trading partners that can lead to materially lower tariffs. 'This context sets the stage for officials to be more prepared and stand ready to adopt counter-cyclical policies,' she said. She said the government's fiscal policies have been moving in the right direction. Lavanya said this round of global volatility comes as fiscal consolidation was gaining traction but could justifiably be delayed. It would, however, be important for the government to remain prudent with fiscal support, sticking to targeted measures and moving ahead with measures to broaden the revenue base, albeit keeping in mind the shock to growth, she said. Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid As to the issue of government spending due to US tariffs and the risk of fiscal consolidation, Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said there is always a chance that it could happen. In the past, he said the government would make some alterations to the budget in order to account for the new development, especially when there are impending economic shocks on the horizon. 'So, the government has to be pragmatic and such pragmatism can be a positive factor for confidence building,' he said. Asked whether the pressure from tariffs could delay some of the government's revenue boosting measures like delaying of petrol subsidy etc, he said: ' The issues involved have to be clearly identified. This will dictate how the policy responses can be crafted effectively and efficiently. 'The tariff shocks would affect the exporters and therefore, the assistance should be focused on them. They might need some tax breaks or grants and microfinancing that will help them navigate the challenges. 'The point here is, the assistance has to be targeted. On petrol subsidy rationalisation, if the system is already in place and has been tested and the results are robust, I suppose it can be rolled out. So we need to be very clear on the issue,' he noted. Centre for Market Education CEOCarmelo Ferlito Centre for Market Education CEO Carmelo Ferlito views the effects of government spending as mostly negative. 'Government spending is the main source of inflation and its so-called 'stimulus' impact is only temporary, creating unsustainable situations in the mid to long term. 'It would be better to move in the direction of a more friendly fiscal system, with ad hoc solutions linked to external trade and work without pause for radical free trade agreements,' he said. Furthermore, he said the government's announcement of the delay in subsidy rationalisation due to the US tariffs is not a good move. He said this is because tariffs are fought with more free trade agreements, not by delaying reforms which are key for the structural renascence of the country, Ferlito said. Commenting on the measures the government should undertake to ensure fiscal consolidation with a strong revenue base and less debts, he said: 'The key is always cutting spending. Without a clear plan of rationalisation of the public sector, including the apparatus of government-linked companies, any fiscal reform will be limited in its impact. 'In terms of the revenue side, I advocate for lower income tax and reintroducing goods and services tax plus better enforcement. We should renounce burdensome initiatives such as e-invoicing. But, again, without a clear plan of cutting spending, fiscal consolidation is impossible,' he said.
The Star
28-04-2025
- Business
- The Star
Act now to shield exports
PETALING JAYA: As Malaysia's exports come under pressure in 2025 due to the US trade protectionist policy, economists suggest the country should take proactive measures to ensure exports are not severely impacted. This year, they expect Malaysia to record a positive trade surplus, although lower than last year's figure. A trade surplus occurs when a country's exports exceed its imports. Exports of goods and services as a percentage of real gross domestic product (GDP) stood at 68% in 2024. RAM Rating Services Bhd economist Nadia Mazlan RAM Rating Services Bhd economist Nadia Mazlan, who anticipates Malaysia's export growth to soften this year, told StarBiz the country should engage in swift and successful trade negotiations with the United States to boost exports. This is crucial to prevent the re-imposition of higher reciprocal tariffs on Malaysia, which could significantly affect export demand this year, she said. However, Nadia noted that Malaysia may need to ramp up imports from the United States in return, which may offset some of the widening trade surplus. 'To further strengthen Malaysia's export momentum this year, exporters can leverage existing trade agreements. 'One example is to tap into new demand from the United Kingdom, which recently ascended to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. 'In the more medium term, Malaysia could diversify its export markets through deeper engagements not only with Asean, but other regions like the Middle East and Africa,' she said. Nadia proposed for Malaysia to continue its efforts to move up the value chain to produce more high-technology goods to bolster the resilience of its export market. She projected Malaysia's trade surplus will remain positive in 2025, albeit a slight moderation from last year's RM136.8bil. Weaker global trade activity is expected to impinge exports more than imports. Nadia explained that Malaysia's export and import growth typically move in tandem, given that about half of imports are intermediate goods. However, the drag on import growth is expected to be muted as imports of consumption goods should be supported by relatively robust domestic demand. 'The front-loading of purchases to get ahead of reciprocal tariffs could lend some support to Malaysia's export growth. 'Electrical and electronics (E&E), Malaysia's key export product, is expected to continue driving export demand, fuelled by continued advancements in artificial intelligence and the semiconductor upcycle,' she said. Exemptions on certain semiconductor chips should help drive near-term demand, Nadia explained, although E&E-specific US tariffs currently under review could stifle some of the momentum if implemented. Malaysia registered a growth of 5.7% in exports last year. In March 2025, total trade expanded by 2.2% year-on-year (y-o-y) to RM249.89bil – the highest March figure on record. Exports surged 6.8% to RM137.31bil, also a record for the month, while imports fell by 2.8% to RM112.59bil. The trade surplus widened by 94.4% y-o-y to RM24.72bil, the highest monthly value since June 2023 and the 59th consecutive surplus since May 2020. OCBC Senior Asean economist Lavanya Venkateswaran OCBC senior Asean economist Lavanya Venkateswaran said that to boost Malaysia's exports in the near term, frontloading exports to the United States and staggered capital goods imports would help maintain the trade surplus. Over the medium term, she suggested tapping into new trading partners and diversifying the export base would help make exports more resilient. She noted that Malaysia's export growth would likely be shaped by the implementation of US tariffs. 'Currently, we estimate that about 46% of US imports from Malaysia are exempt from tariffs, hence, the frontloading of exports to the United States is likely to continue until the tariffs come into effect. 'Our baseline (forecast) is for goods exports (under the GDP accounts) to slow to 2.7% y-o-y in 2025, versus 5.5% in 2024, while goods import growth is expected to slow to 3.5% y-o-y, versus 9.5% in 2024. 'E&E has been the backbone of export growth in the region, and we expect the frontloading of exports to the United States to also benefit this category,' she noted. Venkateswaran forecasted trade surplus to remain sustainable this year. 'Even with export growth slowing, import growth will also likely ease, allowing for a relatively comfortable trade surplus in 2025. 'We forecast the current account surplus will remain comfortable around similar level to 2024 (for example, 1.7% of GDP). 'However, the risk is that volatile trade flows could lead to lower current account surplus,' she said. A current account surplus means a country has more exports and incoming payments than imports and outgoing payments. Generally, a higher current account would be considered a positive for a country's international currency reserves. Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid expects Malaysia to record a trade surplus this year, albeit slightly lower than last year. To boost exports, he said the government would need to increase outreach to export-oriented micro, small and medium enterprises to encourage better utilisation of preferential treatments under various free trade agreements (FTAs) with other countries. 'This will help improve access to new markets and reduce the cost of doing business,' he said. Centre for Market Education CEO Carmelo Ferlito To further enhance exports and strengthen the trade surplus, Centre for Market Education chief executive officer Carmelo Ferlito said policymakers must push for more FTAs and zero reciprocal tariffs. He also pointed out that numerous non-tariff barriers, both in the West and South-East Asia, need to be dismantled to facilitate more trade. He also highlighted that it's a mistake to look at things from an aggregate perspective without considering the microfoundations, as economic activities occur at the micro level. Elaborating on this, Ferlito said: 'It is important to understand that it is not Malaysia trading with the United States or the European Union (EU). 'For example, by merely stating that we can move 10% of exports from the United States to the EU overlooks the fact that it is a Malaysian firm exporting to an American or European firm. 'Commercial transactions are between firms, not countries. 'So, can the US client find a more cost-effective supplier after the tariff? What are the transaction costs involved in such a search? 'And, if the American client is lost, can the Malaysian firm find a European customer to replace them?'
