The country's RM7.3 billion economic stimulus package will dent government finances but will not affect the country's ratings, Standard and Poor's said today.

The package, unveiled by Prime Minister Mahathir Mohamad to mitigate the effects of Severe Acute Respiratory Syndrome and to revive the sluggish economy, involved RM1.7 billion in government's budget and the rest from banks.

The rating agency said federal government expenditure was slightly lower than its own expectations but was still expected to lead to a deficit of about 5.5 percent of 2003 gross domestic product.

"As a result, general government net debt is expected to increase to 37 percent of GDP by year-end 2003, up from 36 percent in 2002," it said in a statement.

This net debt level, however, is still broadly in line with Malaysia 's BBB rating median of 36 percent of GDP, and with its peers, it said.

Going forward, the agency said incoming premier Abdullah Ahmad Badawi's administration was expected to keep fiscal policy loose in 2004 ahead of a general election which must be called by the end of next year.

Not likely to meet target

"The targeted return of central government to fiscal balance by 2005 is unlikely to be met," it said.

Abdullah, who is now deputy premier, is slated to take over the top post when Mahathir retires at the end of October after 22 years in power.

Standard and Poor's said Malaysia 's ratings would be enhanced if it return to fiscal consolidation to put general government net debt firmly o­n a declining trend.

"Conversely, a prolonged delay in fiscal consolidation would degrade the country's fiscal flexibility and increase the private sector's dependence o­n fiscal spending," it warned.

This will "adversely affect the competitiveness of the private sector, and depress Malaysia 's credit standing," it added.