KUALA LUMPUR: The government's move to rationalise diesel subsidies is unlikely to move the needle on Malaysia's sovereign credit rating, with only the rationalisation of RON95 subsidies likely to make an impact, says economists.
They argue that the impact is too small, and only the upcoming removal of petrol subsidies might significantly influence the credit rating.
Oxford Economics Macro Forecasting and Analysis economist Sheana Yue said the diesel subsidy removal is a positive first step but 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 which have not been revealed yet," she told Business Times.
Director and Founder of Williams Business Consultancy Sdn Bhd Dr Geoffrey Williams said the diesel subsidy rationalisation won't affect credit ratings, as the measure is too limited and the RM4 billion involved is too small to make a significant impact.
He suggests that while long-term subsidy rationalisation can aid the fiscal balance, it should be used positively, ideally ring-fenced for debt repayment rather than general operating expenditure.
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 a "A- with a stable outlook" rating.
National Graduate Institute for Policy Studies Japan's assistant professor of Development Studies Guanie Lim said these scores are better than some of the economies at a similar gross domestic product per capita level as Malaysia.
For example, Malaysia is almost always rated higher than both Brazil and Argentina.
"It is in our national interest to maintain and even widen our position vis-à-vis them," he said.
"I do not expect any upgrades on our credit rating, and we will remain an investment-grade sovereign bond with its current rating. "Our current rating is A3 with Moody's, BBB+ with Fitch and A- with S&P Global. All denotes investment grade rating that implies extremely low default risk, said Corporate finance professional David Singh.
However, 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 cost 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," added Doris.
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.
Doris 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," added Doris.
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," said Nambiar.
Guanie said 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)/value added tax (VAT) being a significant step. However, this has been delayed for various reasons," he added.
Guanie said 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.