Are red lights flashing for our economy?

Moody’s Investors Service, the reputed international rating agency, today flashed red lights about the likely emerging weaknesses in our economy.

This warning comes so close on the heels of the Budget 2018 speech, made by the prime minister just last Friday.

Moody’s has given us a rating of A3, with a “Stable Outlook”. This is good except for the fact that it also highlights the following warnings:

1. Moody’s is not optimistic that the Budget forecast of 5% to 5.5% growth will be achieved, and instead, thinks that only a 5% growth is likely. This lower rate of growth projected by Moody’s means that there will be some slowdown in economic activities, with the implications being lower incomes and higher unemployment. Let’s take heed of this red light.

2. Moody’s cautions that our budget revenues, as a share of the gross domestic product, is among the lowest in its rating category of A3. It highlights the fact that Budget 2018 has no new tax proposals. We are thus depending on just the natural growth of revenues, estimated to continue to decline to 16.6% in 2028 from 21.4% in 2012, just five years ago. This is not healthy. Should we tax the higher-income groups more?

Even this lower proportion of tax to GDP may not be realised, as commodity prices and the world demand for our exports may not rise as much as expected. What if commodity prices decline to lower than our projections, like for oil and gas, and palm oil?

3. On the other hand, budget expenditures have been significantly raised in the so-called “Election Budget”, especially operating expenditures, while still maintaining high development expenditures.

4. The Budget could, therefore, come under considerable strain. The struggle to achieve the deficit target of 2.8% of the GDP could therefore be very challenging for Budget 2018 .This would be a red-light signal for the not only the health of the Budget, but the economy as well.

5. The debt, which is now estimated at 51.5% of GDP for next year, could rise further to finance a worsening budget current account deficit. Already, Moody’s warns that this debt rate is much higher that the A- rated median of 40.9 %for this year.

Is this another red-light warning to tell us to be more careful, lest we get downgraded by Moody’s from the current rating of A3 to something lower?

Conclusion

The Moody’s report on our economy is analytical and frank. It highlights some red-light warnings as to what our Budget and economic weaknesses are, and the challenges we face. It is good that we have independent and competent international rating agencies, and the World Bank and the International Monetary Fund, that give us objective, though sometimes, too subtle, advice.

Hopefully, we will take heed and be guided by their views, taking into account our own concerns, which only we can fully appreciate, and act accordingly. But, red lights cannot be ignored, lest we run the risk of serious accidents!

Article published in The Malaysian Insight.

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