KUALA LUMPUR, Nov 10 — Political volatility could derail Putrajaya’s bid to reduce its debt pile as the ruling parties would likely overshoot its spending target to avoid electoral backlash from a public still reeling from the Covid-19 Pandemic, Fitch Solutions said today.

Government expenditures have already surpassed budget projections for two consecutive years since the beginning of the pandemic.

In 2020, revenue underperformed while expenditure increased as a result of the measures taken to combat the pandemic leading to the actual deficit coming in at RM87.6 billion or 6.2 per cent of GDP compared to a projected RM34.5 billion or 2.5 per cent of GDP.

The Fitch Group unit projected the government’s fiscal deficit to be 6.3 per cent of its GDP in 2022, which is slightly wider than the government’s projection of 6.0 per cent.

"We believe that the government is likely to underperform its revenue projection, while the risk of overshooting budgeted expenditure remains high as the pandemic remains in play,” it said in a statement.

"While the government’s decision to pursue a highly expansionary budget will help support the economic recovery over the short-term, the continued accumulation of government debt as a result will diminish the prospects for development expenditure as more revenue goes towards interest payments overtime,” Fitch Solutions added.

The government under Prime Minister Datuk Seri Ismail Sabri Yaakob tabled a record RM332.1 billion federal budget for 2022 last month in a bid to revive an economy crippled by the coronavirus, raising the development spending to pump money into firms and households hoping it would aid recovery.

The Umno-led government won bilateral support to raise the statutory debt limit to 65 per cent of GDP from 60 per cent previously, even as it deals with internal turmoil, allowing it to unveil an expansionary budget that could help mitigate the growing public unrest.

Fitch Solutions predicted the debt limit could be raised further to 70 per cent of GDP by the next elections in July 2023 as the ruling government seeks to retain power.

"We expect the government debt limit to be raised to 70 per cent of GDP by the next elections in July 2023, and are pessimistic about the long-term fiscal health of the country, as the highly competitive political environment makes fiscal consolidation once the pandemic ends unlikely,” it said.

Government estimates for 2021 indicate that there will also be a slight degree of overshooting in 2021.

Fitch Solutions said it expects pandemic related risks to raise the likelihood of increased spending over the RM23 billion allocated for Covid-19 related expenditure.