PUTRAJAYA is unlikely to achieve its fiscal deficit target of 3% for 2020 if an expansionary budget is implemented next year, said economists.

They said this is because of the government’s limited fiscal flexibility, adding that the government will have to look at revising its target to 3.3%-3.4% instead.

The Finance Ministry is expected to take a slight step back from the earlier commitment of lowering the fiscal deficit to 3% of GDP in 2020, said Stantley Tan, head of global treasury at OCBC Bank (Malaysia) Bhd.

It’s likely the fiscal deficit will stand at 3.4% of GDP in 2020, which is the same as the target for 2019, he said.

Tan told The Malaysian Insight that Malaysia’s debt level is seen as standing at a higher end of the range when compared with similarly rated countries.

“Malaysia has unfortunately seen a large portion of its fiscal flexibility tapped in the years preceding the change of government with the ramp up of direct and indirect debts, commitments, guarantees (e.g. 1MDB) and contingent liability undertakings,” Tan said.

According to data from Bank Negara Malaysia, the government’s current liabilities stand at RM799.11 billion as of the end of the second quarter this year.

However, an accommodative monetary policy will ensure that the country’s financial condition remains supportive of the economy in the face of heightened global economic uncertainties, said Tan.

“Broad populist measures may be put in place to persuade the top 20% of EPF contributors to withdraw their discretionary EPF savings beyond the RM1 million mark in favour of spurring local private investments and domestic consumption, which also ensures that the dividend payout to the less privileged 80% faces less dilution in light of lower returns now of the EPF’s investment income,” he added.

Meanwhile, Dr Shankaran Nambiar, senior research fellow at the Malaysian Institute of Economic Research (MIER), said an expansionary budget might be implemented out of limited choice, as a mechanism to counter the negative effects from the US-China trade war.

He said it’s difficult to envision on how the government will be able to spend more without raising its debt, adding that Putrajaya could cut corners by curbing spending on operating expenditure, perhaps by freezing hiring in the civil service or by cutting down on pension payments.

“One cannot expect largesse from a government that is cash-strapped. There is likely to be some hold back on allocations for public institutions.

“There has to be some flexibility with the fiscal deficit. The 3% target will have to be bent, perhaps to 3.3% or 3.4% and that will not evoke punishment from the rating agencies.  They know that this is a prudent government, it is not a kleptocratic government,” he said.

Sunway Business School professor of economics Dr Yeah Kim Leng, said the government can ease up the fiscal deficit position to up 3.2% or 3.3% of GDP, instead of 3% for 2020.

Each 0.1% percentage point will amount to an additional spending of about RM16 billion, assuming that nominal GDP growth is maintained at around 5.5%-6.5% for 2020, added Yeah.

Agreeing with Shankaran, Yeah said the government can slash its operating expenses, especially on supplies and services.

Finance Minister Lim Guan Eng earlier suggested that the government will consider implementing an expansionary budget next year to weather the negative effects of the Sino-American trade war, despite its aim of consolidating the fiscal debt. 

Budget 2020, the second budget under Pakatan Harapan, will be tabled on October 11. – September 21, 2019.