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Further reduction in Malaysia's fiscal deficit will be a challenge - Moody's

[KUALA LUMPUR] Malaysia's fiscal consolidation is likely to be "very slow" and remains a credit challenge along with high debt levels, ratings agency Moody's said on Tuesday.

Prime Minister Najib Razak has been able to lower the fiscal deficit every year since taking power in 2009 and that has been significant for maintaining Malaysia's investment-grade sovereign credit ratings.

The fiscal deficit dropped to 3 per cent in 2017 and the government has forecast a further drop to 2.8 per cent this year. But further consolidation will not be easy, Moody's said.

"Although the trend of fiscal deficit reduction has been maintained, the implementation of further fiscal consolidation remains a major credit challenge," Moody's analysts said in a report.

Further fiscal consolidation "is likely to be very slow absent any meaningful revenue-raising measures," which the past two budgets did not have, they said.

Second finance minister Johari Abdul Ghani said in January Malaysia was unlikely to meet a target of a balanced budget by 2020 and would need another two to three years to reach the goal.

"Achieving this goal will likely rest primarily on economic growth, rather than any structural budgetary measures," Moody's said.

The ratings agency expects economic growth to moderate to 5.2 per cent this year, from 5.9 per cent last year.

It also said government spending was likely to slow down after a general election that is due by August, adding that it expected Mr Najib's ruling coalition to retain power.

Mr Najib, under pressure to shore up his government's popularity, in October unveiled a budget aimed at winning votes.

He announced a spending increase of 7.5 per cent for 2018 from last year, and said the government planned to cut personal income tax for lower-income citizens, pay more to pensioners and spend billions on schools, hospitals and rural infrastructure.

The government's debt level - which Moody's has forecast to be at 48.7 per cent of gross domestic product - is higher than peers though risks are mitigated by a large proportion of ringgit-denominated debt and a spread out maturity schedule, the ratings agency said.

Outstanding household debt, at 84.3 per cent of gross domestic product at the end of last year, also posed a challenge, Moody's said.