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Tuesday, December 17, 2013

Economist warns of subsidy-cut impact

| December 13, 2013

By John Gilbert

KUALA LUMPUR: The government’s continuing policies in reducing subsidies on fuel, sugar and power may result in a weaker domestic demand for 2014, a Nomura Research economist said yesterday.

The economist said while the government’s measures are seen as positive, the consolidation and monetary tightening may slow private consumption but added that Malaysia’s high degree of openness will allow its external demand to pick up.

“Through these subsidy cuts, we are optimistic on the Malaysian government being serious and on the right track to continue the plan in cutting fiscal deficit moving forward.

“The move would present some drag on growth particularly on public spending and also on the effect on consumption and investments,” Nomura Singapore Ltd ED and economist for South-East Asia Euben Paracuelles said in a media briefing in Kuala Lumpur yesterday.

He said the focus will be on the momentum of the reform which is slowly building and forecast gross domestic product for Malaysia to rise 4.5% for 2014 from an expected 4.3% in 2013.

In recent news, Energy, Green Technology and Water Minister Dr Maximus Ongkili said the government expects to cut expenditure by RM2 billion annually from the reduction in subsidies for the power sector, a move that would save RM4 billion.

However, it would still have to pay about RM2 billion in other subsidies to help the lower income group.

Touching on the implementation of the Goods and Services Tax (GST) in April 2015, Paracuelles said the move will impose a fiscal drag on growth, particularly on public consumption.

“Because the GST is implemented in the early part of the year, the drag on growth is expected to be seen for three quarters, however, now is the right time for the prime minister to initiate the GST as well as other fiscal consolidation policies,” he said.

The research house sees 2014 as a year of continuation of proactive government policies aimed at lowering the fiscal deficit and keeping the external accounts in a comfortable surplus.

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