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Malaysia 2021 fiscal outlook revised downward on pandemic risks

Against the backdrop of reduced revenue collection and increased stimulus spending from the Government stemming from the imposition of lockdowns for a far longer period than previously anticipated, Fitch Solutions Country Risk & Industry Research has lowered Malaysia’s 2021 fiscal deficit forecast to 7.4% of gross domestic product (GDP) from 6.4%.

Against the backdrop of reduced revenue collection and increased stimulus spending from the Government stemming from the imposition of lockdowns for a far longer period than previously anticipated, Fitch Solutions Country Risk & Industry Research has lowered Malaysia’s 2021 fiscal deficit forecast to 7.4% of gross domestic product (GDP) from 6.4%.

“Our view for the Government to raise the debt limit (to 65% of GDP from 60%) has played out after the Government took on significant debt to introduce RM205 bil in stimulus spending since the beginning of 2021 in order to cope with the lockdowns that it has imposed,” the research house pointed out in its latest commentary.

“With fiscal space being even more limited now, we do not expect any more stimulus spending for the remainder of 2021 while 2022 is likely to see a marked decrease in government spending as the new administration under Prime Minister Datuk Seri Ismail Sabri Yaakob appears determined to reopen the economy and treat COVID-19 as endemic.”

As for 2022, Fitch Solutions expects a slightly narrower deficit of 6.6% of GDP on the back of improving revenue collection to improve even as government spending will stay elevated although this will be capped somewhat by fiscal constraints.

“The economy is likely to remain exposed to significant headwinds due to the Delta variant which could periodically tip the country into localised lockdowns,” projected Fitch Solutions.

“This is an especially salient risk if the Government does not formulate and execute an effective plan to give booster vaccination doses to its population in 2022 which would render them more vulnerable to infections as 2022 progresses.

“These events would exert downward pressure on both revenue and expenditure but as Malaysia’s experience over the past one-and-a-half years has shown, revenue is affected much more seriously compared to expenditure especially if stimulus packages are introduced to cope with the lockdowns.”

 

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