Budget 2014 a watershed moment: CIMB Research

Published: Monday September 23, 2013 MYT 5:21:00 PM 

Updated: Monday September 23, 2013 MYT 5:26:15 PM

KUALA LUMPUR: Malaysia has reached a turning point and needs to show that it is ready to embark on bold fiscal reform and economic restructuring in the Budget 2014 proposals to be unveiled on Oct 25, starting with a move to rein in the budget deficit,CIMB Economics Research says.

It says on Monday the country’s fiscal challenge comes amid the risk of sovereign rating downgrades and investors' focus on the vulnerabilities of the domestic and external sectors at a time when foreign capital is flowing out.

It says Prime Minister-cum-Finance Minister Datuk Seri Najib Razak is tasked with making some necessarily tough decisions to reassure investors that the government had the political resolve to address the country’s fiscal issues.

“There are differing expectations on the budget but the reality is that the government needs to plan its operating and capital spending within its financial capacity,” CIMB Research stresses.

It adds that Malaysia is facing a number of domestic and external challenges, which require the fine-tuning of its macro-economic policy mix for growth and macro-economic stability over the medium term.

“Domestic tail risks include a slowing economic growth momentum, persistent fiscal and rising debt situation, a narrowing of the current account surplus of the balance of payments (BOP), as well as rising operating cost for companies and cost of living for households.

“External tail risks emanate from the recent sharp volatility in equity, bond and foreign exchange markets, no thanks to capital reversals due to the Fed's potential tapering of easy money and monetary stimulus,” explains CIMB Research.

It says among the things the Government needs to do is 1) embark on fiscal reform, by drawing up a timeline for rolling out the GST, making gradual subsidy rationalisation, and ensuring it spent within its means; 2) sustain private investment momentum, through corporate tax cuts and incentives for industries, 3) ensuring a sustainable external balance, by controlling public project, especially those with high import content.

It adds that property cooling measures and affordable housing initiatives are also required, and urged the Government to double floor price of properties purchased by foreigners to RM1mil.

Last but not least, CIMB Research says, there is a need to strengthen social safety net of low and middle-income households.

“The government has maintained its 2013 fiscal deficit target of 4% of GDP (-4.5% of GDP in 2012), -3% in 2015 and a balanced budget by 2020. We think this year's budget deficit target of 4% of GDP is still attainable, given the favourable revenue outcome. In the first half of this year, the actual budget deficit stood at 4.1% of GDP.

“We expect the government to target a fiscal deficit ratio of 3.5% of GDP for 2014,” CIMB Research says.