KUALA LUMPUR: The rationalisation of diesel subsidy will not affect Malaysia's sovereign credit rating, according to economists. 

They argue that the only change that would be significant to the country's credit rating would be the rationalisation of RON95 subsidies. 

The diesel subsidy in Peninsular Malaysia was lifted on June 3, with its price rising from RM2.15 to RM3.35 per litre.

The targeted diesel subsidies are the third step in the government's efforts to restructure subsidy allocations following the RM4.5 billion savings from electricity tariff adjustments and RM1.2 billion savings from floating the prices of chicken and eggs.

The rationalisation of the diesel subsidy, according to Dr. Geoffrey Williams, director and founder of Williams Business Consultancy Sdn Bhd, won't have an influence on credit ratings because the RM4 billion at stake is too small and the measure is too restricted.

While long-term subsidy rationalisation can help maintain the fiscal balance, he said that it should be used constructively and ideally ring-fenced for debt repayment as opposed to ongoing running expenses.

Last year, Moody's rated Malaysia's sovereign credit rating at "A3 with a stable outlook," with Fitch Ratings providing a "BBB+ with a stable outlook" rating, and S&P Global Ratings assigning an "A- with a stable outlook" rating.

According to Guanie Lim, an assistant professor of development studies at the National Graduate Institute of Policy Studies in Japan, these results are superior to those of several other economies with comparable gross domestic output per capita to Malaysia.

He pointed out that Malaysia consistently receives higher ratings than Argentina and Brazil.

"It is in our national interest to maintain and even widen our position vis-à-vis them. I do not expect any upgrades to our credit rating, and we will remain an investment-grade sovereign bond with its current rating," Lim said.

He said that rating agencies conduct periodic surveys and can downgrade the country's rankings if certain parameters are not met. 

"They typically scrutinise government spending to assess if it is sustainably managed. If not, they look for measures taken to restore budget health.

"One of the recommended actions is to broaden our tax base, with the implementation of goods and services tax (GST) and value-added tax (VAT) being a significant step. However, this has been delayed for various reasons," he said.

Lim said that rationalising the diesel subsidy will help boost confidence, but it is essential to trim other subsidies in a coordinated manner.

"There is a natural limit to subsidy rationalisation, so it would be more effective to pair it with measures like the staged introduction of GST/VAT," he added.

David Singh, a corporate finance professional, said that Malaysia's current rating is A3 with Moody's, BBB+ with Fitch, and A- with S&P Global. 

All denotes an investment grade rating that implies extremely low default risk, he said.

Meanwhile, IDEAS Malaysia economist and assistant research manager Doris Liew said diesel rationalisation will marginally improve Malaysia's credit rating and trust in a fiscally sustainable government, signalling economic stability.

While the business costs for transport-heavy industries will increase, Malaysia aims to benefit in two ways.

"Firstly, our diesel price of RM3.35 per litre remains lower than our regional neighbours, including RM4.24 per litre in Thailand. "Since business costs are relative, there is no reason for foreign direct investment (FDI) to suffer due to higher costs. What matters is that we remain a relatively attractive destination for business in the region," she said.

Secondly, a higher credit rating boosts investor confidence, reduces the perceived risk of doing business, and lowers borrowing costs for the government. 

"This will positively impact our fiscal consolidation efforts and make it cheaper to borrow money for our much needed development projects," she said.

Liew, however, agrees that the diesel industry itself is relatively small, and even if the rationalisation is successful, it will not single-handedly improve our credit rating.

She said the upcoming rationalisation of RON95 subsidies will be more significant and, if successful, will demonstrate a strong government capable of introducing much-needed, albeit unpopular, reforms.

"This will greatly boost business confidence and Malaysia's standing as a credible and effective policy implementer," she added.

*Malaysian Institute of Economic Research head of research and senior research fellow Dr. Shankaran Nambiar said rating agencies will naturally monitor the success of subsidy rationalisation policies.

"If there is a backlash or implementation fails, the agencies might be forced to re-evaluate their assessment. Rationalising diesel subsidies is just the beginning, further action on RON95 will likely be needed before Malaysia receives full approval from the rating agencies," he said.

Sheana Yue, an economist at Oxford Economics Macro Forecasting and Analysis, noted that while the removal of diesel subsidies is a positive initial move, it is too small to significantly impact credit ratings.

"It will require several more measures and their sustained implementation to influence credit ratings effectively, she said.

"The upcoming petrol subsidy removal might be more likely to move the needle, although that too depends on the details that have not been revealed yet," she said.

https://www.nst.com.my/business/economy/2024/06/1065826/limited-impact-malaysias-credit-rating