KL's toll hike U-turn may set off more credit downgrades

MALAYSIAN'S recent U-turn on an unpopular toll hike raises questions about its commitment to fiscal reforms, analysts said, and could trigger another round of credit downgrades from ratings agencies.

Credit Suisse said Malaysia's decision not to raise toll rates after all could hasten a sell-down of Malaysian debt papers among foreign investors, especially in a rising interest-rate environment.

As it is, the ringgit has been falling as investors move money out of Malaysia. The ringgit fell to RM3.33 to US$1 yesterday from around RM3.26 last week.

"Rating agencies are watching PM Najib (Razak) to assess his resolve in the unpopular, but critical, policy of reducing the fiscal deficit," Credit Suisse said in a report yesterday. "The apparent U-turn on toll rate hike is a red flag."

Prime Minister Najib's administration is walking on a tightrope between economic prudence and political expediency, as it faces pressure by international rating companies to cut its long-running budget deficit and fix a ballooning public debt over the years.

Malaysia has one of the highest levels of public debt in the region, at more than 53 per cent of gross domestic product (GDP) last year, and is edging closer to its self-imposed threshold of 55 per cent of GDP.

By holding back on unpopular moves until after a fiercely fought general election in May last year, the government is running out of time to soften price shocks, said Dr Chua Hak Bin, a regional economist at Bank of America Merrill Lynch based in Singapore.

He expects inflation to rise to 4 per cent this year from 3.2 per cent in December last year, and hit 5 per cent next year as more fuel subsidy cuts kick in this year.

"The government lost several opportunities to even out price adjustments previously due to the general election," he told The Straits Times on Monday.

"And so, it has not much of a choice this time round."

A large chunk of government spending is for subsidies - from fuel to cooking oil and sugar, keeping the prices of these essential items artificially low for decades. It spent almost RM25 billion (S$9.5 billion) in 2013 on fuel subsidies alone.

Malaysia avoided credit downgrades after Datuk Seri Najib rolled out a slew of tough measures starting September last year to cut public spending. The government raised pump prices to RM2.10 from RM1.90 per litre, removed sugar subsidies, and said it would introduce a goods and services tax next year. It also raised electricity tariffs.

When the government's concession agreements on toll rate hikes came up for renegotiation last month, toll rate increases appeared next.

But instead of allowing a rate hike, the government said last week it would compensate the toll operators with RM400 million, seen as a move to quell increasing anger over rising living costs.

Two weeks ago, the government also said it was giving cash handouts this month to 7.9 million citizens earning RM4,000 and below to help them cope with rising costs.

If Malaysia continues along this path, it will not hit its target of a balanced budget by year 2020, Credit Suisse said yesterday.


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