Malaysia expected to tackle soaring debt in budget

OCTOBER 25, 2013

Malaysia is expected to introduce an unpopular consumption tax in its 2014 budget today – a move which may not bode well for Najib and Barisan Nasional.Malaysia is expected to introduce an unpopular consumption tax in its 2014 budget today along with other measures to address soaring debt that has raised the spectre of a credit downgrade.

Malaysia has one of Asia's highest debt-to-GDP ratios, its budget deficit swelling in recent years on massive populist spending by Prime Minister Najib Razak's coalition ahead of elections earlier this year in which it extended its 56 years in power.

"The government will do what is right for our economy. Some measures may not be popular now, but over the medium term, what is good for the economy is also good for the people," Najib said in a statement late yesterday.

Najib will table the budget at 4pm.

Ratings agency Fitch in July lowered the outlook for Southeast Asia's third-largest economy to "negative", over expected slower growth and rising debt.

Fitch also said Najib's weak election showing in May could crimp his plans to push economic reforms.

Top Malaysian officials have been forced to publicly refute fears of a national credit default, with Najib recently calling the risk "minimal".

Economists said markets were looking for concrete measures such as a Goods and Services Tax (GST) to reduce debt. The tax is expected to be implemented from 2015.

"The market expectations are really quite high," said Selena Ling, a Singapore-based economist with OCBC Bank.

"Two to three per cent (GST) won't surprise the market on the upside. It could be four to five per cent."

Economists also expect further cuts in subsidies for key items such as fuel and sugar.

Najib already made some cuts last month, raising fuel prices – for the first time since 2010 – by just over 10%. He said the move would save the government about RM1.1 billion ($350 million) this year.

Spending cuts are also anticipated.

With his long-ruling coalition facing diminishing support, Najib has lavished cash handouts on voters.

Under the ruling Barisan Nasional, resource-rich Malaysia enjoyed decades of growth, foreign investment inflows and rising living standards.

But competition from lower-cost rivals China, Indonesia and others has pressured growth prospects and raised fears over whether Malaysia can escape the "middle-income trap".

To help maintain foreign investment flows, Najib has sought to reduce the budget deficit to 3% by 2015, down from 4% this year.

He has also pledged a balanced budget by 2020 and to keep the debt-to-GDP ratio under 55%. The ratio doubled from its 2007 level to 53.7% in 2012.

Malaysia's central bank in August lowered its 2013 economic growth forecast to 4.5-5%, down from 5-6%, amid slack external demand for the export-reliant country's goods.

Najib was reaffirmed as leader of his ruling party last weekend but faces considerable conservative opposition to economic reform. – AFP, October 25, 2013.