Fitch Sees Local Election Outcomes to Reduce Malaysia’s Near-term Political Risk

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Fitch Ratings said on Tuesday that immediate risks to the stability of Malaysia’s coalition government have eased in the wake of local elections in six states.

The rating agency said in a statement that it believes the recent state election outcomes in Malaysia will be sufficient to ensure the continuity of the coalition in the near term.

The state elections saw the coalition between Pakatan Harapan (PH) and Barisan Nasional (BN) retain power in three states, while the opposition Perikatan Nasional (PN) kept control of the other three states.

Fitch believes that Malaysia’s 2024 budget, due on Oct. 13, will advance subsidy rationalization, likely to focus initially on electricity and diesel subsidies.

It also opined that the election outcomes could encourage the Malaysian government to prioritize other aspects of its economic policy agenda, such as those focused on containing living costs, raising wage growth and improving welfare.

Fitch also noted that the Malaysian government has some headroom to accommodate such spending.

According to the rating agency, Malaysia’s revenue grew strongly over the first six months of 2023, rising 19.4 percent year-on-year, while expenditure rose by only 10.6 percent.

“We believe the federal government deficit target of 5 percent of gross domestic product (GDP) for 2023 should be achievable even with modest additional spending,” it said.

Fitch also said when it affirmed Malaysia’s rating at ‘BBB+’/Stable in February 2023, it assumed that the authorities would reduce federal government deficits gradually to an average of around 4.5 percent of GDP in 2023 to 2025.

“We have since revised this to 4.3 percent, but our forecast is still wider than the 4.1 percent target that the government has laid out for the period in its Medium-Term Fiscal Framework for 2023-2025,” it said.