Putrajaya’s U-turn on toll hike could drive economy down, warns Credit Suisse


(TMI) – Putrajaya’s decision not to allow an increase in toll rates this year could prove detrimental to the economy as rating agencies may announce a downgrade of Malaysia’s economic outlook, warned global financial firm Credit Suisse.

In its report titled “Red Flag: Market valuation premium at risk”, the firm said that any move by Prime Minister Datuk Seri Najib Razak to back away from austerity measures could affect foreign investors’ sentiments.

“Rating agencies are watching PM Najib to assess his resolve in the unpopular, but critical, policy of reducing the fiscal deficit. The apparent U-turn on toll rate hike is a red flag,” warned the report.

“A major U-turn could cause a rating downgrade. In a rising interest rate environment, foreign investors would then sell their huge bond holdings,” it added.

The report also noted that any rating downgrade by rating agencies would affect Putrajaya’s plan to achieve a balanced budget by 2020.

On February 5, Deputy Prime Minister Tan Sri Muhyiddin Yassin had announced that the government would not be raising toll rates this year after public backlash over a slew of subsidy cuts that came into place since September last year.

Muhyiddin had said the move would cost the government RM400 million which has to be paid as compensation to the various toll concessionaires, which Putrajaya had earlier said it could not afford under a plan to cut the federal deficit.

Putrajaya has embarked on unfavourable austerity measures to cut its fiscal deficit after receiving a rating downgrade by Fitch Ratings in July. The agency had warned that “Malaysia’s public finances are its key rating weakness”.

The government decided to reduce subsidies by raising the prices of fuel, sugar and electricity tariffs and plans to implement the goods and services tax (GST) by 2015.

However, public outcry against the rising cost of living, Najib’s increasing unpopularity with the public and pressure from within his own party, Umno, has pushed Putrajaya to buckle from raising toll rates.

Credit Suisse said that in the event of a rating downgrade which would likely lead to bond selling by foreign investors, domestic funds would have to step in “to absorb the foreign bond selling” but that the move will come at a cost.

“Domestic funds would, to some degree, be forced to sell domestic equities or at least, not to buy any more,” it noted.

Malaysia’s stock market is at risk of such movements due to the high levels of bond ownership by foreign investors, said the firm.