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'Unstable labour market can affect Malaysia's growth'

Publication Date : 01-10-2012

 

Malaysian Rating Corp Bhd (MARC) concurs with the ministry of finance’s (MoF) forecast of gross domestic product (GDP) growth of between 4.5 per cent and 5.5 per cent for 2013 fiscal year, but cautions that instability in the labour market can affect headline growth.

MARC, which forecast a 5.3 per cent GDP growth, said in a statement yesterday it concurred with the MoF’s view that external sector would experience a slight recovery but growth would be largely dependent on domestic sources.

“The wildcard, however, is the extent to which the labour market may be affected by the ongoing weakness in the external sector.

“If setbacks in export-oriented industries begin to trigger instability in the labour market and result in significantly higher retrenchment, private consumption - and hence headline growth - may be adversely affected,” it said.

On the fiscal balance, the rating agency said the government’s budget deficit target was within reach as it felt the revenue forecast was “overly conservative and should be exceeded in 2013”.

“Although the expenditure forecast may also be on the low side, we do not think that this will be detrimental to achieving the deficit target. Bear in mind that except for the recession years, the government has underestimated its revenue by an average of 8 billion ringgit (US$2.61 billion) per annum in the past 10 years,” it said.

“We also think that the government’s deficit target is achievable because it would take only 5 billion ringgit to reduce the deficit by 0.5 percentage point,” the rating agency said.

On top of that, the Government’s commitment to bringing down the deficit level to 3 per cent of GDP by 2015 has been clearly stated during the budget.”

MARC said the biggest wildcard, however, would be global oil prices, with the government expecting a moderation in 2013.

“If global growth recovers more strongly than expected, petrol and gas subsidies will necessarily increase beyond the budgeted amount,” it added.

The rating agency is encouraged by the focus on alleviating the financial burden on the low- and middle-income segment of the population, such as the one percentage reduction in personal income tax for those with income up to 50,000 ringgit per annum.

“Notwithstanding this, we feel that the long-term solution would be adjusting the breadth of the tax bands which is a more effective measure to assist middle-income families, as the marginal tax rate increases rapidly as individual income grows,” it said.

On an overall basis, MARC said, the budget broadly met the competing needs of fiscal consolidation while attempting to address the aspirations of the people.

“That is an unenviable balancing act which, despite some areas of weakness, the government has managed to achieve.”

 

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