KUALA LUMPUR (May 11): The surprise victory of the opposition Pakatan Harapan (PH) coalition in Malaysia's 14th general election (GE14) held on Wednesday, means a much higher likelihood of fiscal and economic policy change, says Fitch Ratings.

In a report today, the global rating agency affirmed its A- rating on Malaysia with a stable outlook, noting the election result was unlikely to lead to significant economic policy shift.

However, Fitch highlighted policy slippage leading to deterioration in fiscal discipline and higher government debt or deficits as a negative rating sensitivity.

"The extent to which the new government's agenda will shift major policy is uncertain, but the PH victory and its policy platform indicate a much greater potential for change. In the meantime, Fitch will monitor the new government's policy agenda as it evolves," the report added.

The PH platform includes proposals to roll back tax and subsidy reforms as part of a 100-day fiscal plan, the agency noted.

Among the most notable proposals is the replacement of the Goods and Services Tax (GST) that was launched in 2015, with the narrower sales and services tax (SST) that had preceded it.

"The GST has become a key source of government revenue, accounting for 18% of total revenue, equivalent to just over 3% of gross domestic product (GDP) in 2017.

"By comparison, the SST accounted for only 8% of total revenue and 1.6% of GDP in 2014. As such, absent offsetting measures, the replacement of the GST would result in a correspondingly higher deficit," Fitch added.

The rating agency also pointed to another significant element of the PH platform: a proposal to reinstate some fuel subsidies that were eliminated in 2015.

"Fuel subsidies accounted for around 1.7% of GDP in 2014 before they were rationalised, declining to 0.3% in 2015. Therefore, if fuel subsidies are reinstated, they could offset some potential budgetary gains from rising oil and commodity prices," the report said.

Other notable PH platform policies include a review of government contingent liabilities and a Royal Commission of Inquiry to investigate recent corruption scandals, Fitch added.

"Reviewing contingent liabilities could limit the build-up of risks to broader public finances over the long term, though at the expense of creating some headwinds for domestic demand and growth.

"(However,) an inquiry into scandals could improve governance indicators over time, mitigating a key rating constraint for Malaysia," Fitch said.